Innovation Development and Regional Competitiveness in Hungary

8.4. Innovation Development and Regional Competitiveness in Hungary

Earlier we have already mentioned Schumpeter's viewpoint which emphasizes the importance of the innovation development aspects among the factors of regional competitiveness. This viewpoint is confirmed the technical experience and information which states that productivity in the developed countries has been increased by 80% due to some kind of innovation. Innovation is essential for the companies to increase their competitiveness, export capability, to create new jobs and to enhance the quality of services, that is, to increase social welfare. All this indicates that the construction of knowledge-based economies in the global social and economic process of the 21^st century is extremely significant. Only those countries and regions can be competitive which reset their structures of production to manufacturing products and services having high levels of added value. In the past decade, mostly the technologically intensive and innovation-oriented industries have been able to develop. The expansion of competitiveness to the level of regions serves as an organizing principle for such areas as the local development of economy, regional development and regional innovation policies and it determines the direction of regional development strategies and the priorities of competitiveness enhancement for a longer period of time (Gál, 2004).

Beside the earlier more powerful innovation developments at the corporate level, the enhancement of the local and regional competitiveness is becoming the target area of innovation processes and research and development actions. Innovation developments nowadays are regarded as a tool of sustainable development. Innovation is also a tool to create new and better jobs which are knowledge intensive and have more added value, to enhance the standard of living among the population and to eliminate the development-related differences between the regions. The knowledge-based economy and the creation of regional competitiveness need a broad expansion of innovation capacity and the direct delivery of other innovative market knowledge to the participants of the economy. Thus, the institutions of the innovation system, as parts of the economy enhancement and regional policies, can operate efficiently if they are decentralized not only organizationally but also regionally. The economic attraction of the regions depends on the network cooperation between the various research bases, the innovative small and medium businesses and the innovation development organizations, as well as on the efficient operation of the broad and decentralized system of innovation-supporting organizations and network of institutions and on the success of the innovation development actions coordinated by them.

As for the renewal of the national innovation system in Hungary, the starting point must be the fact that the economic changes of the early 1990s affected the research and development (R&D) activities and the innovation very adversely. There were hardly any financial resources for the R&D. The effect of the political and economic changes on the R&D&I sector and the relationship between R&D&I and the industry was very dramatic. It was not only the economic and market capabilities of the R&D institutions that changed but the conditions of the industry also changed. Furthermore, the corporate structure in Hungary also underwent a transformation process (a great number of small and medium businesses appeared in place of the former large state-run companies). The existing R&D infrastructure showed the sign of disintegration and as the R&D institutions of the companies disappeared, the rate of the corporate financial resources in the R&D sector brought about a drastic drop. Even nowadays, less than one third (29.7%) of the financial resources spent on R&D comes from the corporate sector.

As an adverse consequence of the economic and political changes and as a byproduct of the privatization process, the research bases were disintegrated, the research facilities of companies were cut back and at the same time, the national institution system of innovation became very weak and the R&D-related government policies were pushed into the background. All these factors caused that transition and crisis management became the top priorities in government policies rather than the stimulation of development. Around the 2000s, it became more and more obvious that the top-level management and the institution system of innovation must be reformed. At the end of the 1990s, it was apparent that the legal harmonization with the EU directives (like the Lisbon strategy of May 2000, which was a result of the Lisbon Summit) the decentralization of the innovation system would sooner or later become inevitable. The Hungarian government, following the pattern of national innovation strategies devised in other EU countries, set tasks at a national level to reduce the technological lag and to enhance the innovation capability. However, it turned out that neither the local nor the national innovation strategies were sufficient, which made it difficult to make the Hungarian strategy a part of the international systems (Gál, 2004.)

In spite of the latter mentioned factors, there was some motion after Hungary joined the EU on May 1, 2004. There was more emphasis on the regional innovation processes in Hungary as well, since the area-related innovation development programs were integrated into the GVOP program of the National Development Plan and also into the New Hungary Development Plan. The role of innovation has become more important in the regional policies and the new regional economic development policy also adopted the support of technological transformation and the establishment of an innovation network. All this required an independent act of innovation and the proper representation of innovation in the area development act with an appropriate background of national institutions and a system of tasks and means. The institutional reform was legally ensured by the act on research and development and technological innovation (Act CXXXIV of 2004). The basic goal of this act is to support competitiveness based on knowledge and the utilization of knowledge and the development of the Hungarian economy based on knowledge and innovation. The act on innovation provided a base for devising the innovation policy goals and the coordination of the innovation tasks of the various industries. However, the draft of this act failed to recognize that innovation is a set of activities performed in space, and thus, it did not include the tasks and actions necessary to resolve the problem of the deformed regional structure of innovation, nor did it refer to the regional aspect of innovation development.

There are two factors which require the regional aspects to be made a part of the act on innovation: 1. the 2001 EU innovation-oriented area development policy, which integrated the R&D and innovation subsidies into the target system of the structural and cohesion subsidies and 2. the handling of regional inequalities coming from the deformed structure of the Hungarian innovation system (Figure 8.4.).

Figure 8.4: GDP per capita compared to the average of EU 27 (%), 2009

Source: CSO Regional Statistical Yearbook, 2010.

Figure 8.5: The two slopes

Source: own edition based on Rechnitzer, 2004

Based on the above mentioned fact, the regional characteristics of innovation can easily be described. Of course, Budapest is not only the determining economic, social and cultural centre of Hungary but it is also the only real innovation centre of the country. Budapest and its region provides 49.3% of all the R&D bases, its share of R&D employment is 58%. Also, this region receives 65% of all R&D expenditures and 64% of investments. The R&D expenditures of the central region reach 1.6% of the region's GDP. This rate is between 0.2% and 0.6% in other regions of the country. The rate of people working in R&D compared to all the active workers is quite low 0.2% to 0.5%) outside the central region, while in Budapest this rate (3.2%) represents the highest Western European level (Figure 8.6).

Figure 8.6: R&D expenditures per 1,000 residents, number of R&D employees per 10,000 residents, 2010

Source: CSO Regional Statistical Yearbook, 2010

There has been a long-standing contradiction in the coexistence of economic and innovation processes: while the innovation of the economic structure has always been faster in the western and north-western regions, these regions have had an adverse position regarding R&D and the number of higher education institutions. The university centers of Hungary (Budapest, Szeged, Debrecen, Miskolc, Pécs, Veszprém) are still the main scenes of R&D, the other counties and their towns are far behind regarding R&D activities. On the other hand, the western and central counties of the Dunántúl (west of the Danube) region, which are at the top regarding economic growth, incomes and attracting foreign capital, have far less potential for development (the financial and institutional means of moving from mass production and lease-work toward activities requiring knowledge), which endangers their competitive advantage in the long run.

Regarding the development of R&D infrastructure, the slowly increasing number of R&D bases established in the dynamic regions by international companies is a very promising development.

However, the slow increase in the corporate financing of R&D cannot compensate the role played by the government (Figure 8.7.).

One of the major deficiencies of the area development policy in Hungary is the fact that the legislation on transforming the country's area structure focused primarily on the area development act, while the basic documents of area development and the government efforts to eliminate regional inequalities have not been carefully coordinated with R&D and higher education. The area development act of 1996 and the National Area Development Concept of 1998 targeted the structural issues of R&D and higher education but the set directions of development were not analyzed in depth and comprehensively. The regional aspects became somewhat involved with the issue through the regional development poles. While a significant regional equalization happened in the higher education (there was a significant drop in the number of university students in Budapest during the 1990s), the reasonable decentralization of R&D resources was not even attempted (Figure 8.8 and 8.9).

Figure 8.7: Number of employees per region, 2010 (capita)

Source: CSO Regional Statitical Yearbook, 2010.

8.8.

Figure 8.8: Number of students in higher education in counties 1990, 1996, 2001 (capita/1000 residents)

Source: Rechnitzer–Smahó, 2005.

Figure 8.9: Number of students in higher education per 1,000 residents, 2010

Source: CSO Regional Statistical Yearbook, 2010

The R&D potential significantly affecting the regional competitiveness has not been able eliminate the regional differences in Hungary up to the day (Figure 8.10, Figure 8.11). The institutions representing the area policies and the experts involved in innovation developments have become more and more convinced that the issue can be solved only by implementing regional innovation strategies at regional level and by establishing a really decentralized system of institutions. The regional innovation management and the system of organizations must be built on the regional knowledge bases and must have a bridging function between the participants of the economy and research bases. The task of the regions and the decentralized regional system of innovation organizations must be the coordination of the national sector strategies at a local and regional level and the mobilization of local resources which would serve the implementation of the development goals. The implementation of a really successful and supply-oriented regional innovation policy requires a concentration of the institution system, the R&D and the supporting resources with economies of scale into so called regional innovation centres which have knowledge-generating and intermediary (integrating into networks) functions.

Figure 8.10: Regional differences in Hungary – research and development

Source: CSO

Apart from the operative programs of the national development, the new National Area Development Concept (NADC) of 2005 through a significant breakthrough regarding innovation. The Concept intended to transform the higher education centres outside Budapest into regional innovation centres and developing them to regional knowledge centres, on the premise that it is most necessary to strengthen the potential of scientific centres in the country to counterbalance the exaggerated central role of Budapest and to develop the knowledge-based economy. For this reason, the NADC devised a program of development poles to help the establishment of regional innovation centres, to decentralize the innovation potential, to eliminate the regional inequalities and to strengthen the regional competitiveness. The strengthening of development centres would achieve a dual target. On one hand, it would develop the local innovation, economic, cultural and commercial functions of the poles themselves. On the other hand, the program would create conditions (accessibility, cooperative relations, sub-centres) which would enhance the irradiating effect of the poles (NADC, 2005).

Figure 8.11: R&D expenditures in the percentage of GDP in regions, 2009

Source: CSO, 2011

The development poles might be built on those major regional higher education and scientific centres (Budapest, Debrecen, Győr, Miskolc, Pécs, Szeged) which have strong innovation-related and significant higher education and scientific potentials and also significant regional and macro-regional roles. Beside all this, these centres have such significant and special R&D capacities could speed up the regional diversification of R&D in specialized directions (Szeged: biotechnology, Miskolc and Győr: mechatronics, Debrecen:

pharmacology and Pécs: cultural industry). An important medium-range goal of the pole program is to make the major cities of Hungary suitable to become the organizing forces of their regions through conscious aspiration, incentive competitions and by meeting the requirements of development poles.

Some of the outstanding criteria of becoming development poles are the following:

 the town or city has an organizing force to form their own region even over the borders,

 the presence of high-level R&D and innovation functions with high-level knowledge-based economic activities and a wide range of university training,

 the development and enhancement of the city or town addresses development needs in their broader region,

 a strong cooperation with the other towns and villages and areas of the region,

 the social, economic (local market) and political role of the city or town corresponds to their size,

 the presence of cultural and service supply which can meet higher levels of demands and the presence of a great number of highly skilled workforce.

Figure 8.12: Regional development poles and axes

Source: OTK, 2005

The cooperation of development poles and the major cities and the development axes along the traffic lines between the poles have a distinct role in strengthening the region's competitiveness. Thus, the development poles are significant factors in not only strengthening regional competitiveness but also in the balanced development of the country's city network.

These poles, as integrated parts of the country's network of cities and villages, should form strategies to share functions with the development sub-centres within the region and they should make use of the advantages coming from the cooperation. The strategies of the poles and the tasks of the network cooperation should be integrated into the regional development strategies in a way that the poles could strengthen the network of relations in the network of cities through the sub-centers which closely cooperate with the poles.

Győr, which is the development pole of the western part of the Dunántúl, shares the tasks with sub-centres like Nagykanizsa, Sopron, Szombathely and Zalaegerszeg. Due to the special placement of the city network in the central region of the Dunántúl, Székesfehérvár and Veszprém organize their pole tasks together with Dunaújváros and Tatabánya. In Northern Hungary, Miskolc operates as a pole with Eger and Salgótarján. In the Northern Great Plain region, Debrecen cooperates with Nyíregyháza and Szolnok, while in the southern part of the

Dunántúl, Pécs is the pole, Kaposvár and Szekszárd are its sub-centres. In the case of Budapest, it is especially important that the development plans should include the plans related to the agglomeration area and the strategies of the region as well. Beside the towns mentioned as sub-centres, the poles, if necessary, should form a close cooperation with other towns of the regions and the major cities beyond the state borders to enhance the region's competitiveness.

Finally and to sum up, it must not be ignored that the implementation of the various policy actions devised to strengthen regional competitiveness and to eliminate regional differences is not only the task of politicians dealing with area development but it is a task which requires the cooperation of all other policies where actions at a national or government level are necessary. International experience proves that the decentralization of innovation development can be achieved only through government incentives and significant decentralization of resources. As several international examples show, the consequent implementation of the definite ideas coming from the central government is a basic requirement so that the R&D&I resources could be allocated and activated successfully at a regional level. The state cannot stay out of financing innovation and maintaining R&D institutions even in the developed countries, since R&D cannot be supported internationally and the government (central or regional), unlike the risk capital financing, must enforce long-term national interests as well.