The European Paradox and the Innovation Activity of the Hungarian SME Sector

Over the past two decades, Hungary has built a market-oriented, globally com-petitive economy. It has become a major exporter of manufactured goods. Investments by multinational enterprises have helped the economy diversify into more technologically advanced sectors, such as information technology, cars and pharmaceuticals. Hungary has made steady progress but still has a long way to go to close the income gap vis-à-vis high-income OECD countries. The level of innovation activity and performance has remained relatively low by internation-al standards. Overall business spending on R&D as a percentage of GDP was less than half the EU-average in the last years, at 0.48% compared to 1.1%. Nearly three-quarters of this spending is by majority or fully-owned foreign firms, and half a dozen firms alone account for more than one third of the total. This is attributable to both lagging innovation capabilities in the business sector and an insufficient contribution of public research organizations to the innovation system. In the long-term, this high share of R&D funding by foreign firms will only be sustained if R&D intensive firms link more closely with local research institutes and other firms. There is a need for more stable governance of the innovation system and a more evidence-based approach to policy making in the area of science, technology and innovation policy. Hungary exhibits some features of a „dual economy”. On one hand, it has large, often foreign-owned companies, which are well integrated in international production, distribution, and, in some cases, R&D and innovation networks, but not always well connected to the rest of the Hungarian innovation system. On the other, there is a large sector of domestic firms, notably SMEs, characterised by low productivity and insufficient innovation capabilities, which typically operate in local markets with relatively unso-phisticated demand. In my paper I will analyze the indicators of the low level of activity and performance in R&D and innovation, especially in SMEs.