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The following OECD assessment and recommendations summarise Chapter 5 of the  Economic Survey of Hungary 2005  published on 19 July 2005.

The government’s focus on increasing innovation has included setting up a new decision-making structure involving senior politicians which has a welcome focus on encouraging commercially sustainable innovation. In terms of specific measures, R&D grants are being funded through a new special levy on businesses and grant allocation for applied research is focusing more on research with strong commercial potential. There is also greater targeting on specific areas of scientific research. In addition, tax breaks for R&D spending have been increased and regulatory changes have made it easier for universities to create spin-off companies.

R&D activity is low

1. 2000 for Australia, Luxembourg and Switzerland; 2001 for Greece, Ireland, Italy, Mexico, Netherlands, Sweden.
Source: OECD, Main Science and Technology indicators.

All forms of innovation benefit from healthy general business conditions

Healthy general business conditions are the precondition for Hungarian innovation to take off. This should be a key consideration in overall thinking on innovation policy. The country’s sizeable small-and-medium enterprise sector means the creation of new products and processes on an informal basis is an important aspect of innovation in a broad sense. In addition, good framework conditions are also important for ensuring that the embodied know-how in imported capital equipment and foreign business techniques continue to pull Hungary up the value-added chain through imported innovation. In terms of framework conditions relating to ICT, a significant step to further strengthen competition among providers was taken just last year (the 2004 Telecommunication Act) but it is too early to tell how it is working. However, price data signalling relatively high telephony costs suggests that the market, particularly the dominant player, needs to be closely monitored.

Critical evaluation of targeted measures should now be a top priority

Following the recent changes made in the financial incentives for R&D through tax relief and grants, the authorities should now focus on critical evaluation of the impact of measures. This process should bear in mind the following:

• R&D tax relief is already high in international comparison and coupled with the often sceptical conclusions from research on the impact of tax relief, suggests that these incentives may be too high and deadweight costs could be substantial.

• Given the increased spending on grants, it is important that the authorities follow up on plans to improve monitoring of individual programmes. The authorities should also consider the potential for spillover effects to other sectors in deciding which areas to target. Unsuccessful programmes should be closed.

• Assessment of the Innovation Fund system should focus on whether the opportunity for businesses to reduce their innovation levy by increasing R&D activity has successfully widened private-sector innovation.

More regulatory work is needed in to strengthen commercial orientation in public-sector research

One of the key steps to increase commercially oriented public-sector research has been the introduction of lighter regulations relating to university spin-off companies and the secondment of researchers to the private sector. However, more regulatory work needs to be done, particularly regarding the Hungarian Academy of Science (HAS). One way of helping HAS reform would be to raise the importance of joint work with business in evaluating HAS’s research activities and to strengthen the link between performance and budget allocation. Reforms may also require more performance related pay components for HAS’s researchers, and the abandonment of unconditional tenure.

In tertiary and vocational education, weak response to changing labour market demands could stifle innovation

The introduction of shorter and more vocational degrees and several other measures, as part of a recent act on higher education, that strengthen responsiveness of tertiary education are welcome. However, more progress in reforms to tertiary-level teaching is needed to raise the long-term potential for innovation. Despite the recent reforms, there is still some criticism of supply responses in courses offered by the tertiary sector to changing labour market demands. For innovation these weaknesses risk that any take-off in research industries will get stifled by shortages of suitably qualified graduates. Further reform efforts should include:

• The government should try again to introduce greater consultation between the tertiary sector and business on the content and mix of courses.

• More pressure is needed for the tertiary education system to shift more quickly out of areas of excess supply. In this regard the government should consider making greater use of incentives in tertiary-education funding to encourage changes in the allocation of teaching resources.

• In vocational education, stronger supply responses to changing labour market demands are also needed. In particular, practical training, consultation and cooperation with the business sector should be strengthened.

Long-term innovation capacity would also be helped by reform to compulsory education

In compulsory education the authorities recently took welcome steps to improve quality, notably with the introduction of output measures of student and school performance as well as teaching of ICT and language skills. However, the authorities should take stock of the current system of segregating secondary-school students into vocational and academic streams. The system has a tendency to misallocate students and the division into vocational and academic streams is anyway less useful in the context of providing skills for modern labour markets. In addition, the teaching profession needs a better alignment of teacher education, career incentives, professional development and school needs. Excessive job protection needs to be addressed as it is undermining motivation. It is also limiting scope for redundancy plans to bring down the number of teachers to match falling student numbers and rejuvenate the profession through larger graduate intakes. Pay structures also need reform; though teachers, along with other public servants, have got large pay increases over the past couple of years, the salary structure overly rewards senior teachers and performance-related pay components remain low. Also, the recent pay increases are unlikely to have dissuaded a common practise of teachers holding second jobs, a situation that is likely to detract from skill development and focus in the teaching profession.

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For further information please contact the Hungary Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Philip Hemmings and Alessandro Goglio under the supervision of Andreas Wörgötter.

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