HIPA: Charting the way to Become the Regional Leader in R&D

CHARTING THE WAY TO BECOME THE REGIONAL LEADER IN R&D

The Hungarian Investment Promotion Agency (HIPA) explains the work it undertakes to promote the country as a research and development and innovation center for the region, and the system of incentives and subsidies it has at its disposal to produce tailor-made offers to potential investors, whether in the countryside or the capital, Budapest.

By BBJ Staff

An investor friendly business environment, highly educated labor force and competitive incentive system: these are the factors that contribute to the success of the research and development and innovation centers in Hungary. The government has been highlighting the role of innovation and research and development to enhance productivity growth and

competitiveness. As such, promoting higher value-added activities and R&D projects has gained a significant role in Hungarian investment promotion policy.

Hungary recognizes the importance of innovation and research and development as the key factor of the future growth of the economy. The country plans to spend 3% of its GDP on research and development by 2030. The clear ambition is to become the regional leader in innovation and R&D.

New economic policies were initiated to support the business environment in order to make Hungary the most advanced manufacturing and innovation center in Central and Eastern Europe. Significant taxation related modifications and a new R&D related incentive system have also been introduced.

The aim of HIPA is to help and support the R&D related projects, no matter where the location of the

HUNGARY’S GROWING R&D STATISTICS

R&D EXPENDITURES AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT

R&D INVESTMENTS AS A PERCENTAGE OF TOTAL NATIONAL INVESTMENTS

R&D EMPLOYEES AS A PERCENTAGE OF TOTAL EMPLOYMENT

2010 2018 2010 2018 2010 2018

1 .14% 1 .53% 0 .79% 1 .02% 0 .84% 1 .02%

Source: KSH

activity within the country is. To this end, HIPA provides tailormade incentive offers, information on the labor pool and state subsidy issues in order to encourage investments. To achieve this goal, significant and favorable changes have been introduced in the R&D cash subsidy system launched by HIPA.

In 2018, the pharmaceutical and automotive industries accounted for a combined 63% of R&D expenditure within manufacturing, while the rapidly increasing ICT sector reached almost 11% of total R&D spending in the business sector in 2018. Last year witnessed a massive increase of 6% in R&D expenditure in Hungary, reaching an overall HUF 693.7 billion (EUR 2.1 bln).

Hungary recognizes the importance of innovation and research and development as the key factor of the future growth of the economy. The country plans to spend 3% of its GDP on research and development by 2030. The clear ambition is to become the regional leader in innovation and R&D.

BUSINESS SECTOR CONTRIBUTION

Based on the available statistical data, it can be observed that the ratio of the business sector’s contribution related to R&D expenditures was the largest in the region. Last year, the number of R&D units in Hungary amounted to 3,445 while the total headcount of R&D related employees reached an absolute record in

CASE STUDY

Sanofi, founded in 1973, is one of the leading pharmaceutical stakeholders worldwide, and its products are distributed in 170 countries. In 2019, Sanofi established its new global competence center in Budapest, which focuses on accounting, HR and finance activities as a center of excellence.

As the second largest healthcare company in Hungary and the 15th most important exporter for the country, Sanofi has been officially recognized as a strategic partner of the Hungarian government since 2013. The company has five sites in Hungary. Chemical development and production take place at the central premises and R&D center in Budapest, but Sanofi also has production units in Veresegyház (33 km northeast of the capital) and Csanyikvölgy (182 km to the northeast, near Miskolc).

the country’s history, employing almost 70,000 people.

The Hungarian education system puts special emphasis on training the qualified labor supply in order to fulfil the need of the corporate sector for high value added positions. In 2019-2020, more than 49,000 students studied business administration, almost 55,000 students were involved in STEM (science, technology, engineering and mathematics) programs and 22,500 students in the field of IT.

Major Hungarian universities have traditionally enjoyed strong cooperation with the most innovative multinational and local companies operating in the country. Hungarian university cities have become cosmopolitan educational centers of the regions, allowing them to attract more and more foreign youngsters to the country.

There are various kinds of subsidies available in the field of R&D, either In 2018, the pharmaceutical and automotive industries accounted for a combined 63% of R&D expenditure within manufacturing, while the rapidly increasing ICT sector reached almost 11% of total R&D spending in the business sector in 2018. Last year witnessed a massive increase of 6% in R&D expenditure in Hungary, reaching an overall HUF 693.7 billion (EUR 2.1 bln).

cash incentives or tax allowances. The Hungarian Government provides a VIP cash subsidy for R&D activities on the basis of individual government decision throughout the whole area of Hungary, including Budapest.

This opportunity is available for large enterprises that undertake to implement an R&D project (qualified as industrial research and/or experimental development activities by the Hungarian Intellectual Property Office) with a minimum value of EUR 3 million during a minimum of a one- and a maximum of a three-year period and undertakes to create a minimum of 25 new R&D jobs and to maintain them for

a minimum of two years after the completion of the R&D project.

AID INTENSITY

The maximum aid intensity is 25% of the eligible costs comprising of: depreciation of buildings, and the rental fee of buildings; depreciation of equipment; personnel costs regarding researchers and developers to the extent of their involvement in the project; costs of material (a maximum of 25% of total eligible costs); and costs related to contractual research (up to a maximum of 25% of total eligible costs). Beside the VIP cash incentive, companies performing R&D activities have the opportunity to further decrease their corporate income tax base with their R&D costs. A total of 100% of the direct costs of fundamental research, industrial research, or experimental development carried out by the taxpayer within its own scope of activities are deductible from earnings before taxes, or 300% of the direct costs of R&D activity (up to a maximum of HUF 50 million) are deductible from the earnings before taxes in cases where research activity is carried out jointly with a specified organization.

Tax payers performing R&D activity are also entitled to social contribution allowances in the case of research or development employees with a PhD or higher academic degree, or students and PhD candidates in doctoral programs. The current rate of social contribution tax (15.5%) can be deducted to 0% in the case of such employees with a PhD or higher academic degree, and to 7.75% in the case of students and PhD candidates in doctoral programs. Despite the COVID-19 pandemic there is a strong interest from companies towards investing in Hungary. One of the main strategic goals of HIPA is to

CASE STUDY

AVL, the world’s leading independent development company in the automotive industry, is building a new automotive test base and development center in Érd (20 km from central Budapest on the southwestern border of the capital).

In the new complex, implemented as part of a greenfield development on 5.7 hectares,

traditional and electric test benches will be used alike from 2021 onwards, for the development, simulation and testing of new generation internal combustion, hybrid and electric engines and power trains.

AVL List GmbH, which has more than 11,500 employees, was founded in 1948 and has its headquarters in Graz, Austria.

CASE STUDY constantly support R&D activities in Hungary, through its management consultancy services for new and existing investors. With the assistance of HIPA, nine R&D project decisions were made in favor of Hungary between January and September 2020, which will create 359 high value-added jobs in the country. HIPA is currently in negotiations with seven other companies planning to decide about their R&D investment projects in the forthcoming months. With the assumption of positive decisions in these cases, 550 new R&D workplaces will be created.

The technology company ARM, which specializes in IT, particularly in microprocessors and graphic processors,

chips and network devices, is growing its staff of developers by more than 50% in its R&D center in Budapest. The expansion project of EUR 9 million will result in the creation of 60 more jobs in research

and development. With the assistance of HIPA, nine R&D project decisions were made in favor of Hungary between January and September 2020, which will create 359 high value-added jobs in the country. HIPA is currently in negotiations with seven other companies planning to decide about their R&D investment projects in the forthcoming months. With the assumption of positive decisions in these cases, 550 new R&D workplaces will be created.