Improved Education key to Better R&D Scores

In line with the Europe 2020 strategy, the objectives of Hungary’s National Strategy for Research and Development and Innovation for the period 20132020 were to increase R&D expenditure to 1.8% of GDP by 2020. While spending on R&D in Hungary is more or less on par with the regional average, and it has been increasing lately, last year it was slightly lower than in 2018. However, spending alone is not the key to improve the country’s competitiveness in the field or its position in innovation scoreboards. For that, more structural changes are required, including the improvement of education, one R&D expert tells the Budapest Business Journal.

By Zsófia Végh

According to the most recent data from last December by the Central Statistical Office (KSH), Hungary spent 1.48% of its GDP on R&D in 2019. While the trend is growing, mostly due to corporate activities, its pace is more moderate than that of the GDP increase. As a result, the figure is lower than the year before (1.53%), when more than HUF 654 billion was spent on research and development, the second highest since 1991.

As for the locations that received funds in 2018, research institutes took the lead with 76% of the national R&D expenditure or HUF 495 bln. Another 13% (HUF 83 bln) was spent in higher education, with 11% (HUF 71 bln) in institutions belonging to the public finance sector and other budgetary institutions. Regarding what the money was spent on, HUF 129 bln was paid from the state budget’s R&D appropriation for R&D purposes. HUF 39 bln, or 30% of this amount, was allocated for research to improve the general level of knowledge. Another HUF 23 bln (18%) was spent on industrial production and technology, HUF 11 bln (8.8%) on agriculture, while HUF 19 bln (15%) went for socioeconomic research on health, according to KSH data. Detre Horváth When it comes to regional comparisons, the European Innovation Scoreboard, which has been published since 2010, is a good indicator of how each EU member state is doing in the field. Based on the complex innovation index, the member states are put into four categories: leading innovators whose performance is 20% above the EU average, including Sweden, Finland and the Netherlands. They are followed by strong innovators (Austria, Belgium, Estonia, France, Germany, Ireland, Luxembourg, and the United

“The Hungarian figures are more or less in line with the regional average, and we currently spend about one and a half percent of GDP on research and development.”

“Increasing funding amounts is not in itself a solution. We believe that the way to bring domestic R&D to a much higher level in the foreseeable future […] will be through the education system. It is there where a significant additional source of funding should already be provided so that capacity can be substantially improved in 5-10 years.”

Kingdom), whose performance is between 90-120% of the EU average.

The next group is the moderate innovators, with 50-90% of the EU average. This is where Hungary and most of its neighbors (the Czech Republic, Poland, Slovakia, and Slovenia) are found, with the exception of Romania, which belongs to the group of lagging innovators that are at 50% below the EU average.

In 2019, Hungary placed 23rd among the 28 member states and was placed third among the Visegrád Four countries, after the Czech Republic and Slovakia, but ahead of Poland.

REGIONAL AVERAGE

“The Hungarian figures are more or less in line with the regional average, and we currently spend about one and a half percent of GDP on research and development,” confirms Detre Horváth, tax and R&D expert at PwC Hungary.

“While this is higher than the domestic values of previous years, the breakthrough that would be needed to catch up with countries that really benefit from technological development is yet to come. To do this, the current spending should be doubled,” Horváth adds. In Hungary, R&D intensity was 1.35% of GDP in 2017, according to the most recent data provided by the European Commission. In Slovakia it was 0.88%, in Slovenia 0.86%, in the Czech Republic 1.79% and in Romania, 0.5%. By source of fund, 56.4% of GDP-expenditure on research and development came from the business enterprise sector, 26.2% from the government, 0.7% from the private non-profit sector, and 16.6% from abroad.

In international comparisons, significant funding is also available in cases where big companies undertake to launch large-scale research and development projects in Hungary, Horváth points out. These projects can receive priority financial support, which, together with the related tax incentives, can amount to up to 30% of the total project cost over a number of years. There are few such generous funding opportunities in European comparison.

“It is also good news that we see that the government is providing more and more resources to support research and development and is committed to maintaining R&D jobs even during the COVID situation,” Horváth notes. In contrast to many other areas, a substantial monthly salary subsidy of several hundred thousand forints has become available for maintaining research and development positions.

SUPPORTED POSITIONS

“We hope that in the second wave of COVID, it will be possible to support these positions to a similar extent,” he adds.

“At the PwC network, our foreign colleagues are always surprised by the high rate of tax and non-tax subsidies that are available in connection with research and development in Hungary,” Horváth explains.

“Where we see the challenge is the fact that Hungary rarely comes up as a possible location for the establishment or expansion of truly significant R&D centers in large multinational companies,” he says when asked where the country is lagging behind.

“The reason for this is not so much the support funds, rather that these groups, at least when it comes to high value-added positions, tend to stick to well-proven locations that can be planned and calculated in all respects. Obviously, this also has to do with the international reputation of the education system, which is difficult to improve in the current funding environment.”

So, what would be needed for research and development to improve in Hungary. According to the expert, it is not simply a case of more funding.

“Increasing funding amounts is not in itself a solution. We believe that the way to bring domestic R&D to a much higher level in the foreseeable future, also outstanding at the regional level, will be through the education system. It is there where a significant additional source of funding should already be provided so that capacity can be substantially improved in 5-10 years,” Horváth explains.