Innovation Ecosystem Key to Sustainable Growth

The analysis and development of the innovation ecosystem and the development of a competitive and productive business ecosystem are essential for Hungary's successful and sustainable economic catch-up, András Balatoni, Director of the Economic Forecasting and Analysis Directorate of the National Bank of Hungary (MNB), said at the launch of the Growth Report 2023 on Wednesday.

Around 1,100 innovation-driven companies were identified in Hungary, which, although they accounted for only 0.3% of operating Hungarian companies, contributed 13% of total gross exports and 22.8% of annual domestic GDP growth. These companies are mature (9-12 years old), predominantly domestically owned, he said.

The Growth Report stresses that in order to continue its economic catch-up in the 2020s and to break out of the middle-income trap, Hungary needs to shift to an intensive, quality-based growth model. By catching up in the 2010s, the Hungarian economy made economic history based on growth that was mainly founded on extensive (quantitative) factors.

Demographic trends, conditions of economic structure and developments in world commodity markets point to a possible slowing or even stalling of the catch-up process in the medium term within the former structures. Emerging victorious in the 2020s will therefore require a shift to a new growth model, one that is defined more by intensive and qualitative traits and is based on increasing productivity and competitiveness as well as improving energy efficiency.

One key element of the intensive growth turnaround is a corporate sector based on innovation and continuous renewal, which enhances the domestic capacity to add value by creating marketable knowledge and skills. Innovation activity in Hungary lags significantly behind the EU average, both in terms of spending and results. The ratio of public and private investments to GDP has increased, but it is also important that they are properly structured to increase productivity.

Particularly among small businesses, the accumulation of intellectual assets (so-called smart investment) is low, which is also shown by the low number of patents, trademarks and designs. Hungary’s innovation efficiency shows a considerable growth potential by international standards, currently being at 57% compared to the EU average, and 37% relative to the TOP 5 EU countries.

Using a framework developed by the Massachusetts Institute of Technology (MIT), one of the world’s leading universities in innovation, this year’s Growth Report analyses the current state of the domestic innovation ecosystem and identifies the key opportunities to progress. To develop the Hungarian innovation ecosystem, the Magyar Nemzeti Bank, in partnership with several other organisations, – together with the Budapest University of Technology and Economics, the National Research, Development and Innovation Office and leading market innovators such as 4iG Plc., 77 Elektronika Ltd., Design Terminal Nonprofit Ltd. and Oncompass Medicine Hungary Ltd. –, joined the Regional Entrepreneurship Acceleration Program (REAP) launched by the Massachusetts Institute of Technology (MIT) business school.

The ultimate goal of the MIT Regional Entrepreneurship Acceleration Program is to support a regional entrepreneurship acceleration strategy based on innovation support. At the centre of this system are ‘Innovation-Driven Enterprises’ (IDEs), which differ from traditional SMEs in that they base their competitiveness on innovation, and their innovation performance enables them to achieve superior business results. Besides being a market driver of innovation, IDEs also make a significant contribution to employment growth through the spill-over effects of their activities.

Institutions – rules, practices and norms – provide the basis for an innovation ecosystem to function properly. The institutional foundations set the framework within which companies operate, protect investors, private property in the broad sense, and innovation, ensure a free flow of resources, fair competition and promote opportunities for cooperation. As a Member State of the European Union, Hungary has an appropriate legal and economic framework, we have access to the EU’s common market, patent rights are guaranteed, and the security of a broad legal environment supports innovation and entrepreneurship. The Hungarian economy is integrated into international production chains and has a high share of FDI, which is also a positive sign of institutional development. Hungary also performs well in infrastructure, with a mid-table ranking within the EU in terms of critical infrastructure for the 21st century, but among the leaders in some segments of digital infrastructure.

All elements of MIT’s five-stakeholder model (university, government, risk capital, corporate and the entrepreneur himself) can be found in Hungary, but the cooperation between the stakeholders and the exploitation of network effects currently lags behind best practices, so there is significant growth potential. The cooperation between researchers and entrepreneurs in Hungary is below the EU average. A change of mindset is needed for cooperation to work well. Cooperation between universities, research institutions, risk capital and industry can be strengthened by targeted instruments. It is equally important that the impact of joint research partnerships between large companies and universities reaches the SME sector, the Growth Report highlights.