Czechia’s overall innovation performance is close to the EU average. However, Czech companies, and especially SMEs, spend relatively little on R&D compared to the EU average. Czechia has an integrated innovation strategy that has become more coherent over time, and public spending on R&D has increased between 2017 and 2024. Public support for R&D takes mostly the form of direct support, but programmes tend to be fragmented, which can increase administrative costs. Further improving co-ordination among funding institutions and streamlining programmes could make it easier for SMEs to identify funding opportunities. Improving indirect support for R&D through clearer and more accessible tax incentives, or a possible shift toward payroll‑based R&D tax credits, could stimulate greater private investment. More incentives for technology transfer, such as sustained support for technology transfer offices and applied PhD programmes, could strengthen linkages between research and industry. Finally, more capacity-building services for SMEs, which could be delivered through regional innovation centres, could help bolster Czech SME’s innovation capabilities.
SME Policy in Czechia
Abstract
Czechia has an average innovation performance at the EU level, although its SMEs tend to spend little on R&D. In 2023, the country ranked in the 14th position in the European Commission’s Innovation Scoreboard, better than other Central and Eastern European (CEE) countries such as Poland, Slovakia, and Hungary. Nonetheless, Czech firms spend relatively little on R&D compared to the EU average, and SMEs are responsible for only a quarter of the overall R&D spending.
Czechia benefits from an integrated innovation strategy which informs most of its R&D and innovation (RDI) spending. Most of Czechia’s public spending on RDI is in line with the main priorities of its Smart Specialisation Strategy, with a trend towards more strategic coherence by all relevant public institutions.
Czechia’s public spending on RDI has increased, but programmes tend to be fragmented and could benefit from further streamlining. External R&D funding, mostly from European sources, has increased from 0.44% of GDP in 2017 to 0.61% in 2021, while internal public funding hovered around 0.6% of GDP. Public programmes are spread across various initiatives based on their funding sources, which can increase administrative costs and create confusion for SMEs in selecting the most appropriate programme. Streamlining the existing programme offering would facilitate access for SMEs.
Czechia could also further encourage private investment in RDI through tax incentives. Existing tax incentives come with a high degree of uncertainty on whether the applicant will be able to receive the expected tax relief and are more attractive to profitable and larger firms. Clearer allocation rules could encourage a bigger take-up of R&D tax credits. Furthermore, a shift towards a system based on a payroll tax credit, rather than a decrease in corporate profit taxation, could further encourage innovation by decreasing the cost of R&D spending directly in the year when this takes place and by making the use of the tax benefit simpler.
Czechia could also encourage more proactively the transfer of technology between universities and businesses. At present, Czech faculty members have limited incentives to collaborate with businesses, as most of their funding is related to teaching and academic research. Czechia could provide longer-term funding to the Technology Transfer Offices (TTO) of universities, as a means to encourage business-research collaborations. Alternatively, it could modify the existing funding structure so that such collaborations increase universities’ resources. Finally, it could create a pilot applied PhD programme.
Capacity building also has a role to play in strengthening the innovation capabilities of SMEs. This includes not only consulting regarding the various available funding opportunities, but also mentorship schemes, business consulting services and incubation programmes. Regional innovation centres such as the JIC (Brno, South Moravia) could be well placed to offer these services.
Czechia has an average innovation performance among EU countries
Czechia has an average innovation performance compared to other EU countries. Based on the 2023 edition of the European Commission’s European Innovation Scoreboard, Czechia is a moderate innovator, ranking in the 14th position in the EU, though above other Central and Eastern European (CEE) countries like Poland, Slovakia, and Hungary. Innovation gathers mostly around large cities, which act as innovation centres. The capital region of Prague is the only one in the country that qualifies as an innovation leader at the European level, followed by the Brno region (Jihovýchod), which qualifies as a strong innovator (European Commission, 2023[1]). This is not surprising, as both cities host the main universities and research centres of Czechia. All other Czech regions score as either moderate or emerging innovators in the EU context.
Some of this moderate innovation performance can be explained by low total R&D spending. Despite an increase in public funding in recent years, Czechia’s R&D spending is still below the EU average: 2% of GDP in 2021, up from 1.77% in 2017, but still below the EU average of 2.15%.
While government funding of R&D has recently increased, business funding as a share of GDP has remained stable, standing at about 60% of the EU average in 2021 (Figure 5.1). This is also visible from other statistics. For example, Czechia had no company in the top 2 500 industrial R&D spenders, according to the 2022 EU Industrial R&D Investment Scoreboard (Grassano et al., 2022[2]).1
Percentage of GDP
Note: The category “Rest of the world” includes European funds.
Source: OECD R&D Statistics database.
Czech SMEs are small players in formal R&D
Against the backdrop of limited national R&D spending, SMEs are even smaller players. In 2020, they accounted for a quarter (27%) of total business enterprise R&D (BERD) spending, corresponding to 0.3% of GDP, which is less than Austria or Hungary (respectively, 0.66% and 0.48%) (Figure 5.2). It follows that most business R&D in Czechia is performed by large companies, which are more likely to take the risks associated with innovation thanks to larger internal resources.
Percentage values
Note: BERD (Business Enterprise Intramural R&D Expenditure) is the total R&D expenditure performed by business. Data refers to 2019 for AUT and DEU and to 2020 for the other countries. The category “Rest of the world” includes EU funding.
Source: OECD R&D database.
Despite low R&D spending, Czech SMEs engage in innovation
Although Czech SMEs do little R&D, they do engage in innovation activities. Czech SMEs are especially active in product and process innovation: in 2020, half of them had developed either a product or process innovation, almost double the share of other CEE countries and sixth among EU countries (Figure 5.3, Panel A). The focus has been mostly on product innovation, with a third of Czech SMEs that had declared having developed innovations in this area. Low SME R&D spending, however, suggests that SME innovations are mostly incremental rather than disruptive.
Czech SMEs are also less likely to collaborate with other businesses compared to peer countries (Figure 5.3, Panel B). Collaboration is crucial for innovation. In 2020, the share of innovative companies which declared they collaborated with other businesses was 30% for small companies and 45% for medium companies. For non-innovative companies, by contrast, it was only 5%. Stronger co-operation between SMEs and other members of the national innovation system (e.g. larger companies and research centres) could improve innovation performance through enhanced access to new ideas, talent, and technologies (OECD, 2023[3]).
Percentage of firms
Note: In Panel A, the category “Developed” includes three categories in the Community Innovation Survey: 1) enterprises that have developed product innovation themselves, with market novelties (profile I), 2) enterprises that developed product innovations themselves without market novelties (profile II), and 3) enterprises that have developed business process innovations themselves, without product innovation (profile III). Category “Introduced” refers to enterprises that have introduced but not themselves developed innovations (profile IV). Category “No innovation” includes three profiles: a) Enterprises that have (ongoing or abandoned) innovation activities but not introduced any innovation (profile V), b) enterprises that have no innovation activities but potential to innovate (profile VI), and c) Enterprises that have no innovation activities and no potential to innovate (profile VII). In Panel B, the horizontal bar in Panel B refers to the median EU country, all firms.
Source: Eurostat Community Innovation Survey 2020 (https://ec.europa.eu/eurostat/web/science-technologyinnovation/data/database). The calculations in Panel B come from OECD SME and Entrepreneurship Outlook 2023 (OECD, 2023[3]).
Czechia has an integrated national innovation strategy
Czechia has an integrated national innovation strategy that defines clear priorities for public investment. The National Research and Innovation Strategy for Smart Specialisation (i.e., RIS3 Strategy) singles out the main technologies, known as key enabling technologies (i.e., KETs), and the main sectors, known as specialisation domains, to be prioritised for public funding.2 These technologies and sectors are prioritised across multiple national strategies and programmes.
For example, CzechInvest, the national investment agency, has changed its strategy to make it more aligned with these priorities. The agency has developed a technology incubation programme that offers mentoring and public support of up to EUR 200 000 per company for the development of proofs of concept in one of the seven priority areas identified by the RIS3 Strategy. It has also set up sectoral hubs for each priority area, which act as centres bringing together firms with R&D capabilities, start-ups, and public programmes.
Czechia has also developed a network of regional innovation centres. One of the most known examples is JIC-Brno, the regional innovation centre of South Moravia, which was also one of the first to align with the RIS3 strategy (OECD, 2024[4]). JIC was established in 2003 as an association between universities and subnational governments and has become an important pillar of the regional innovation ecosystem, offering a wide range of programmes across all business innovation phases (e.g., workshops for mature companies, business mentoring and networking for scale-ups, and an accelerator programme for start-ups).
Going forward, to further better align with the RIS3 Strategy, Czechia’s SME Strategy could become more specific on its innovation priorities. Notably, the SME Strategy mentions supporting innovative entrepreneurship and business innovation in key enabling technologies and priority sectors, without explaining the state of SMEs in these areas, whereas such analysis could help Czech authorities better understand the current baseline and set appropriate targets for improvement. An example would involve understanding the position of SMEs in the use of technologies such as biotechnology and Artificial Intelligence (AI) and aiming to increase the number of SMEs using these technologies by a certain target or growth rate.
RDI funding from external sources is significant but fragmented
Czechia has received growing RDI funding from EU sources. In 2017, the amount of R&D funding originating from outside the country amounted to 0.44% of GDP, or two-thirds of the amount of government R&D funding (0.61% of GDP). By 2021, the two amounts were roughly the same, with external funding having increased to 0.61% of GDP and national government funding having increased slightly to 0.65% of GDP. External funding mostly includes EU sources such as Horizon 2020 or the Recovery and Resilience Facility (RRF), as well as some R&D funded by foreign companies, such as branches of MNEs that are active in Czechia (OECD, 2015[5]).
Some of the effects of this increased funding are already visible. Between 2021 and 2023, Czechia showed the strongest progression in the European Innovation Scoreboard. In 2021, its score was one-fifth below the EU average score (89 compared to 106). By 2023, Czechia’s score was 103, only 5% below the EU average of 108. The strongest improvements were in the categories of SMEs introducing process and product innovations, employment in innovative enterprises, number of innovators, and venture capital expenditures.
One downside of EU funding, however, is that in the context of Czechia it is implemented in a highly fragmented way (see Box 5.1 for an overview of the main EU funding programmes supporting RDI in Czechia). This makes it difficult for companies to keep track of funding opportunities and programme requirements and facilitates the emergence of companies that become skilled at the administrative processes involved in securing EU funding. Moreover, fragmentation implies high administrative costs both for SMEs, which must track opportunities and submit multiple applications, and the public administration, which must oversee and manage several programmes and calls at the same time.
The Recovery and Resilience Plan (RRP) is a large-scale funding programme initiated by the European Union in the wake of the Covid-19 pandemic. Of the EUR 8.4 billion (3% of GDP) allocated to Czechia’s RRP, RDI expenditures amounted to 7%, two percentage points below the EU average (European Commission, 2024[6]). Many RRP programmes are targeted towards SME and midcap support, especially in areas identified by the RIS3 strategy:
A programme to fund the digitalisation of nearly 400 enterprises, of which at least two-thirds should be SMEs and mid-caps, with a focus on process innovation through digitalisation.
A call to fund 90 SMEs to implement individual innovation projects (either process, product, or organisation), as well as a call to create National Centres of Competence and encourage at least 60 SMEs to co-operate in RDI projects with a public research organisation.
A budget of EUR 200 million for public R&D consortia in priority medical sciences and related social sciences, which should be awarded by public tenders.
The OP TAC (Operational Programme Technology and Application for Competitiveness) is an Operational Programme funded by the ERDF (European Regional Development Fund), which aims to encourage economic, social and territorial cohesion across the EU. The OP TAC has a budget allocation of EUR 3 billion, which covers several innovation programmes with a focus on SMEs, especially for knowledge transfer and digital enterprises. Given OP TAC’s focus on territorial cohesion, calls are not available for firms from the Prague region, which has too high an income.
The OP JT (Operational Programme Just Transition) (budget EUR 1.6 billion) is an Operational Programme funded by the Just Transition Fund, which aims to support the regions most affected by the transition to climate neutrality. Czechia’s OP JT focuses on the development of the three coal regions of Czechia (Karlovy Vary, Moravia-Silesia and Ústí), and has RDI and SMEs as declared priorities.
A smaller programme called Digital Europe funds digitalisation projects for businesses, separate from other funding sources. For instance, some of Czechia’s European Digital Innovation Hubs (EDIHs), such as the Cybersecurity Hub, are funded in part by the RRP and in part by the Digital Europe Programme. Most of these programmes cover the current EU budget cycle (2021-2027), with some expenditures being eligible until 2029.
Going forward, Czech SMEs would benefit from a more streamlined approach to RDI public support. Notably, a smaller number of larger programmes disbursing bigger sums would limit administrative costs while ensuring that high-quality projects receive the funding they need to progress. Stronger co-ordination between the various sources of funding would also be needed to ensure that programme objectives do not overlap, and that firms have a better understanding of which programmes are best suited for them. Funding tickets could be split according to different stages of business development, with clear pathways from one stage to the other. This would not mean that only large-scale projects are funded, but that firms can see a clear progression if they meet specific development milestones. This would avoid the so-called “valley-of-death”, where intermediary steps in the innovation process are deprived of funding and firms cannot reach the final stage of commercialisation
Some Czech institutions are already going in this direction. For instance, Czechia’s Technology Agency has combined multiple funding programmes into the SIGMA programme, an eight-year programme supporting applied research projects between 2022 and 2029 (see Box 5.2) (Ministry of Industry and Trade, 2024[7]).
SIGMA is a programme that supports applied research and innovation and is managed by Czechia’s Technology Agency (TA CR). Its current design covers eight years, from 2022 to 2029. It is a complex programme that includes several sub-objectives, some of which have been consolidated from previous programmes of the same agency (e.g. GAMA, DELTA, ETA, ZETA):
Sub-objective 1. Activities of so-called pre-application research, which aim to speed up innovation and make it easier to transfer knowledge and results from research organisations into the business world. This includes ensuring stable technology transfer offices in research organisations.
Sub-objective 2. Early-stage researchers and equality of opportunities in applied research projects, consisting of activities which aim to encourage early-stage research and incentives to be involved in applied research projects, with a focus of ensuring equal opportunities across genders.
Sub-objective 3. Support of the innovation potential of social sciences, humanities and arts, which aims to increase the innovative potential of these domains and apply the resulting outputs to new products, processes and services.
Sub-objective 4. International collaboration, which aims to encourage international collaboration and position Czechia as a destination for cutting-edge research. Projects in this area can also complement other funding sources, such as the EU Operational Programmes.
Sub-objective 5. Cross-sectional support, including activities that strengthen the overall RDI environment in Czechia but are not currently covered by other programmes. Examples include the development of regional innovation ecosystems, support for multidisciplinary approaches in innovation projects, and support for current R&D needs.
Aid intensity varies across sub-objectives and projects, ranging between 75% and 100%. At the end of 2023, the planned expenditure of the programme was CZK 9 billion, of which three quarters was from the state budget.
Source: Technology Agency of the Czech Republic (2024[8]). Programme to Support Applied Research and Innovation SIGMA.
Multi-stage innovation vouchers could boost business patenting
Despite an increase in the past years, patenting levels remain relatively low. In 2021, Czechia had 31 patent applications per million inhabitants, a 50% increase from 2017 but still less than a third of the EU average (Figure 5.4). Czechia was also towards the bottom of the patenting ranking among OECD countries, ranking in the 25th position out of 38 countries in 2021.
Patent applications per million inhabitants in 2021
Source: OECD Main Science and Technology Indicators (MSTI database) and OECD Population data.
SMEs seeking support for patenting their innovations can benefit from two innovation voucher schemes running in parallel. The first, which is funded by the SME Fund and managed by the EU Intellectual Property Organisation (EUIPO), offers up to EUR 3 500 to SMEs which register a patent. The second one, funded by OP TAC, is broader and covers multiple intellectual property (IP) services, with a minimum of CZK 50 000 and a maximum of CZK 500 000 per voucher.3
The two voucher schemes could be combined into a multi-stage voucher scheme, which would support SMEs throughout the entire IP protection process, from the prospecting phase to the patenting phase. Firms that are accepted and successfully complete the first phases could be fast-tracked into the next phase. This would provide SMEs with funding certainty as well as incentives to complete the IP protection process, possibly increasing patenting rates.
The current national R&D tax credit policy has low and declining take-up
Czechia’s tax system includes indirect incentives for R&D, in the form of a tax allowance on the corporate income tax for private R&D spending. This allows firms to deduct 100% of R&D expenses that are below the expenses of the previous tax year, with a 10% extra deduction for expenses above those of the previous year to further reward incremental R&D spending. R&D expenses financed through public funds are excluded to avoid double public funding. In 2014, the Czech tax credit system broadened its coverage of eligible R&D costs to include external R&D services provided by public research institutions, such as universities and other knowledge-based organisations. Czechia’s implicit subsidy rate4 is in line with the OECD average for loss-making SMEs (around 15%) and slightly higher for profit-making SMEs (21% in Czechia and 18% for the OECD average – see Figure 5.5, Panel A).
Despite having implicit subsidy rates in line with the OECD, Czech firms have a limited take-up of tax incentives for R&D. According to the OECD R&D Tax Incentives database, in 2023, R&D tax incentives amounted to less than 0.05% of GDP, three times less than the OECD average (Figure 5.5, Panel B). The number of companies receiving the tax benefit has also decreased in recent years, from 1 300 in 2015 to 750 in 2022 (Czech Statistical Office, 2024[9]).
Note: The implicit tax subsidy rate on R&D expenditures is calculated as 1 minus the B-index, i.e. before-tax income needed by a representative firm to break even on one additional monetary unit of R&D. Data in Panel A refer to the year 2021, data in Panel B refer to 2023.
Source: Data for the graph in Panel A comes from the OECD R&D database. The data for the graph in Panel B comes from the OECD R&D Tax Incentives database.
Several design factors may help explain this low take-up. First, tax allowances are only useful if firms have a positive taxable profit. However, many firms, especially start-ups, invest from external sources and do not turn a profit until years later. For firms which do not have significant profits, a tax allowance on corporate income tax does not alleviate liquidity problems.
Second, existing carry-forward provisions further limit the capacity of this policy to alleviate liquidity constraints. Expenses can be deducted within three years from when they have occurred, a time limit that is quite strict compared to the experience of other OECD countries. Tax benefits which have not been used within three years are, therefore, lost. However, many innovations require a longer period to pay off, which means many R&D spenders may not benefit from the Czech tax allowance as it is currently designed.
Third, there is a requirement that the investment be used for innovation, which is hard to define by tax authorities. The result is that a large share of requests for the allowance is rejected, increasing uncertainty and limiting the effectiveness of the incentive.
As a result of these design issues, few firms have recently had access to the R&D tax credit. The number of SMEs that received the R&D tax credit halved, from 1 000 in 2015 to close to 550 in 2022. The number of large firms also decreased but at a lower rate, dropping by one-third in the same period. As a result, the share of R&D tax incentives going to SMEs decreased from 33% in 2015 to 20% in 2022 (Figure 5.6).
In addition to policy design factors, it should also be considered that the presence of many innovation grants, mostly funded by EU sources (see above), may have decreased over time the attractiveness of the national R&D tax credit policy for Czech companies. However, EU funding is expected to decrease in coming years, as Czechia’s average income per capita gets closer and closer to the EU average, pointing to the importance of improving the national R&D tax policy design to ensure that local SMEs continue to benefit from innovation funding.
Amount of R&D tax incentives going to firms (CZK million, upper bar) and the number of firms getting the incentive (lower bar)
Source: Czech Statistical Institute
Selected reforms could increase the attractiveness of the national R&D tax credit scheme
Against this backdrop, three policy options could be considered to reform the national R&D tax credit system and make it more appealing to local SMEs.
First, the tax authority, which is the government entity in charge with the implementation of the R&D tax credit, could increase take-up by being more lenient in the application of existing requirements. One strategy would be to accept more types of evidence that expenses are truly used for R&D5; a clear list of eligible costs could be provided, together with a list of accepted proofs, to clarify conditions for SMEs. Another strategy would be for the tax authority to partner with other public institutions, such as the technology agency, to evaluate applications, as was done in a pilot project in 2023. The technology agency should have better understanding of whether a firm’s R&D project is truly innovative, whereas the limited technical expertise of the tax authority may lead to an overly cautious assessment.
Second, carry-forward provisions could be extended from the current three years to five-ten years, with a view to increasing investment returns from R&D. In particular, radical innovation projects, which tend to take longer to show returns, would become more attractive if firms could use their acquired tax deductions over a longer period of time.
Third, the base of the tax incentive could change, which would be the most radical reform of the three options. In particular, the deduction from the corporate income tax could be replaced with a credit on the labour costs associated with R&D staff, similar to the system in place in the Netherlands. Most firms that perform R&D have to employ dedicated personnel and thus pay R&D-related labour costs. Since in this case the tax credit would apply in the same year of the R&D expenditure, this reform would mitigate the liquidity issues associated with the current R&D tax credit policy.
These three reforms could be implemented on a stand-alone basis, although they would have the largest impact on R&D spending if they were introduced together.
There should be stronger encouragement of university-industry technology transfer
There is also scope in Czechia for improving the transfer of knowledge and technology from university to industry as a means to further encourage research commercialisation and productivity growth. According to the World Economic Forum (WEF) survey of business executives, Czechia’s level of collaboration between industry and university had improved from a level of four in 2020 to close to five in 2023, on a 1-7 scale. This places Czechia ahead of countries such as Austria and Poland and slightly below Germany (Figure 5.7).
Note. Score based on the following question posed to business executives: In your country, to what extent do business and universities collaborate on research and development?
Source: World Economic Forum Executive Opinion Survey 2023.
Nonetheless, the existing national system of university funding does not give strong incentives for industry-university collaboration6. Four-fifths of university funding, at least for the 26 public universities, come from the state budget in the form of institutional funding, which is divided into three portions (Eurydice, 2024[10]): blocked funding, performance-based funding, and social demand funding.
The largest portion, known as blocked (or stability) funding, accounts for 75% of the total and is allocated based on fixed proportions that reflect the size of each university. This allocation remains relatively constant and is not recalculated annually. The second source, performance-based funding, covers 20% of institutional funding and is determined by eight indicators, such as graduation rate, research and development output, and the presence of foreign students, which are evaluated annually. Applied research outputs are, therefore, included in this 20% of university funding which also includes many other things7. The final source, social demand funding, comprises 3-5% of the institutional funding and is aimed at addressing societal needs, such as shortages in specific professions (Research, Development and Innovation Council of Czechia, 2024[11]).
More recently, there have been some changes to better encourage industry-university collaboration. The long-term assessment of universities and research institutes, which takes place every five years, now includes measures of societal relevance, such as institutional collaboration with businesses and government institutions. Five different components are considered. The largest component, accounting for 50% of the final score, is the quality and quantity of research, which is evaluated by an international panel. The second most important component, “social relevance”, includes applied research, industry-university collaboration, and partnerships with the private sector, and holds a 30% weight on the final score. So far, the focus has primarily been on the existence of such collaborations, but in the future universities are also expected to provide evidence on the effectiveness of these collaborations, for example in terms of university spin-offs (Research, Development and Innovation Council of Czechia, 2024[11]).
Additional reforms to further strengthen university-industry collaboration could include the following ones. First, the national government could empower existing technology transfer offices (TTOs) through targeted, performance-based funding with a longer-term horizon. Most large universities, such as those in Prague and Brno, have some form of technology transfer office that can attract external funds, such as those from OP JAC (Operational Programme Johannes Amos Comenius) or past national technology transfer programmes such as TRIO (Box 5.3). However, these grants do not ensure financial stability, as they are only available for a couple of years and, upon expiration, universities need to compete again in new calls. This financial uncertainty makes it difficult to attract professional talent with the right mix of industry and academic experience. Strengthening TTOs through longer-term funding, conditioned on performance, could provide these offices with more financial certainty and allow them to attract higher-skilled professionals who would be better able to build longer-term relationships between university and industry.
The TRIO programme was a national programme which supported applied R&D collaborations between businesses and research institutes in Key Enabling Technologies (photonics, micro-and nanoelectronics, nanotechnology, industrial biotechnology, advanced materials and manufacturing technologies) and the co-operation between enterprises and research institutes. It took the form of four public tenders between 2016 and 2018, which attracted almost 1 500 applicants and had an average acceptance rate of 34%. SMEs represented two-thirds of the beneficiaries and aid. By 2022, the programme was expected to have cost CZK 9 billion, with an average aid intensity, i.e. the share of the project covered from public funds, of 68%.
The programme had several advantages. It was aligned with Czechia’s innovation and RIS3 strategies and aimed to encourage the transfer of technology between academic research and business, by supporting applied R&D collaborations. It provided higher aid intensity to small companies (45% to 80%, depending on the type of activity, versus 25% to 65% for large companies). Project proposals went through a thorough evaluation, which involved a mix of public servants with knowledge of the various KETs and external experts.
The programme also had some shortcomings. The software that was used for monitoring and administration was bulky, had limited functionalities, and became obsolete to the point that it could only be run on special servers of the Ministry of Industry and Trade, which was administering the programme. The programme was also complex and prone to fund mismanagement. After auditing a third of the projects, around 10% of the audited amount was estimated to be breaching budgetary discipline. The evaluation concluded that most irregularities were caused by “ignorance of the contractual conditions”, which may also suggest complex administrative requirements.
The TRIO programme had limited results, although a formal evaluation, which would have included the creation of a control group, was not conducted. As of early 2024, when 192 of the 495 supported projects had been implemented for at least three years, sales had reached 40% of the target. Small and large companies were the furthest away from meeting the respective targets, reaching between 33% and 37% of the target, while medium companies had reached almost double, close to 65% of the original target. Some of this underperformance may have also been caused by the negative global context during the time of programme implementation, which spanned the Covid-19 pandemic and Russia’s war against Ukraine.
Source: Ministry of Industry and Trade (2024[12]). Final Evaluation of the TRIO Programme.
Second, the national government could better reward applied research at the university level, for example by changing the weights used in the performance-based part of the national university funding system, notably by granting heavier weights to private-public research and technology transfer programmes. In this area, another option would be to create a specific funding programme for TTOs, with funding generous enough to persuade universities to apply for funding. A wage bonus for faculty members who engage in knowledge-transfer activities would be a further option, as done by Spain through the so-called sexenio de transferencia (i.e., six-year transfer) (OECD, 2021[13]).
Third, the government could consider the development of applied PhD programmes, also known as professional doctorates. Such programmes are joint ventures between a university and one or several businesses, where a PhD student undergoes rigorous research in the pursuit of solving a practical problem for the business(es). The industry involvement ensures that the problem being treated is of practical value, as the private partner needs to cover part of the salary costs of the PhD student. The involvement of the university, on the other hand, ensures that the research meets the standard of academic quality necessary for a doctorate degree.
Different policies could be considered to enhance research commercialisation
Innovative SMEs often encounter a gap between the support available in the early stages of their research and innovation process and the final step of commercialisation (i.e., the so-called “valley of death”). There is some evidence that Czech firms may be facing such a gap. According to the Czech Statistical Office, around half of Czech firms (most of which are SMEs) had introduced new-to-market product innovations in the period 2020-2022. However, revenues from novel products were only 8% of sales in that period, half compared to the 16% of 2014.8
The Czech government could explore different options to bridge the “valley of death” and support the research commercialisation efforts of SMEs. One first option would be to target grants towards SMEs with high-potential R&D projects, for example trough special calls for SMEs wanting to commercialise their innovative technologies in the priority areas identified by the smart specialisation strategy. Czechia is already supporting SMEs to bring innovations to market, through calls under the SIGMA programme of the technology agency (sub‑objective 1 – commercialisation) or OP TAC’s innovation challenge call, which focused on projects with TRL (technology readiness level) above 5.9 Supporting SMEs both in the technical innovation process, as OP TAC’s call does, and in the business development process, as SIGMA does, can further develop the innovation capabilities of these businesses. These programmes could be better streamlined according to SMEs’ needs rather than funding sources, for instance by setting up a larger commercialisation call with different arms – business development, technology development, financing development, etc.
A second policy option to support research commercialisation would be to create demand for innovative goods and services through public procurement10. Public procurement for innovation (PPI) programmes enable governments to act as early technology adopters, thus easing research commercialisation. For instance, Innovative Solutions Canada (ISC) is a Canadian PPI programme that aims to encourage innovation among SMEs and is focussed on strategic technologies. The yearly budget of the programme (CAD 150 million, i.e., about EUR 93 million) is ensured by mandating a subset of public sector organisations to contribute 1% of their R&D budget towards the programme. The ISC programme is split according to the TRL level: i) the “Challenge Stream” for early-stage R&D; ii) the “Testing Stream” for later-stage prototype testing; iii) the “Pathway to Commercialisation for SME innovators” stream, for bringing innovations to market.11 The public procurement service of Canada supports the procurement process for the contracts, the federal innovation department (Innovation, Science, and Economic Development Canada) leads the program delivery, and the National Research Council provides technical and industrial expertise. Czechia could consider developing something similar, involving in the programme the national procurement office, the technology agency and the Ministry of Industry and Trade.
While PPI programmes hold promise, some attention in implementation is needed. Indeed, they require a good understanding of the technology needs and specificities on the side of the government, so that evaluation criteria accurately match the needs of the institution organising the tender, encourage the development of the technology, and allow an objective project evaluation. SMEs may also be discouraged by the large administrative costs required to win a government contract, as the involved documents often require a level of administrative sophistication that most SMEs lack. Finally, such programmes may be costly, as SMEs and start-ups may not be able to develop new technologies as cost-effectively as very large companies.
A third and final policy option for encouraging the commercialisation of innovative products by SMEs would be to set up joint financing schemes between the government and private sector investors. Governments support can take the form of grants, preferential loans, or equity investments. In these schemes, governments typically leave the selection of beneficiaries to private investors, who are better placed to assess the innovative potential of the supported company. Nevertheless, these schemes may still require significant administrative capacity from the government. Private investors need to be chosen carefully, and the programme must be structured in a way that provides investors with promising financial returns and some level of regulatory certainty. Selection criteria also require a careful trade-off. If they are too strict, the programme may not attract enough SMEs or may attract only those that would have also attracted private investors alone, limiting the additionality of the policy. If they are too loose, the programme may end up enticing too many low-quality applications.
One example of joint private-public support programme is Korea’s TIPS (Tech Incubator Programme for Start-up). TIPS combines a standard incubation/accelerator programme with private equity investment and a top-up scheme from R&D funds that is only partially repayable, and only in case of success. Firms propose their innovative projects to accelerators that are partners of the TIPS programmes. The accelerators select their preferred candidates and provide them with mentorship and some equity funding, which can be up to twice the investment made by the founders. As the R&D process advances, the government can provide up to KRW 500 million (EUR 500 000) in R&D funding and the accelerator may provide further equity investments, spread across various stages. If the project is successful, firms need to pay up to 10% of the R&D fund back to the government.12
Soft forms of innovation support should be better pursued
The Czech government could also consider the introduction of more programmes that build managerial and innovation skills in SMEs. At present, SME innovation programmes mostly focus on grants and subsidies. These programmes tend to have high costs and require a careful selection of participants in order to ensure that public funds are targeted optimally. However, non-financial support could also prompt more SMEs to innovate. In 2021-2022, Czech SMEs were as integrated with higher education institutions as the OECD median country and less likely to adopt digital technologies than the OECD median (Figure 5.8). Programmes that would support digital technology adoption or stronger co-operation with universities could also encourage SMEs to engage in innovation activities, possibly with small administrative costs.
From 0 (none) to max 200 (OECD median = 100)
Note: Indicators are presented in the form of benchmarking indices and reported on a common scale from 0 to 200 (0 being the lowest OECD value, 100 the median value, and 200 the highest). Innovation networks include firms co-operating on innovation activities with universities or other higher education institutions; firms co-operating on innovation activities with enterprises engaged in international collaboration; firms co‑operating on innovation activities with private business enterprises outside the enterprise group. Only the responses from owners and managers of the business are used in the analysis. Source: Innovation networks: 2021 OECD survey of national Innovation Statistics and Eurostat Community Innovation Survey (OECD, 2021; Eurostat, 2022); Adoption of platform and network technologies: OECD ICT Access and Usage by Businesses; Professional groups: 2022 OECD-World Bank-Meta Future of Business Survey.
Source: OECD SME and Entrepreneurship Outlook 2023 (OECD, 2023[3]).
For example, regional innovation centres could help link local SMEs with possible financiers, suppliers, or clients. Such centres could also be a hub for knowledge and resource sharing, through networking events and tailored advice. However, to be effective, they would need adequate funding, clear targets, and an efficient human resource policy that encourages network formation and stability.
The Czech government should also consider improving the current network of technology parks and incubators. Czechia has at least 30 science and technology parks (The Science and Technology Parks Association of Czech Republic, 2024[14]) and 30 incubators and accelerators (CzechInvest, 2024[15]). However, the quality of these centres is very heterogenous, as also mentioned in chapter 4. Many of the incubators only offer office space, with limited support in other areas such as test labs, mentorship, and consulting. Encouraging public incubators to provide such services, either in-house or through external experts, will improve the quality of services they provide to SMEs.
Czechia’s innovation strategy is broadly in line with European priorities. Both the national and the regional Smart Specialisation Strategies were developed according to the European Commission’s Guide to Research and Innovation Strategies for Smart Specialisation (European Commission, 2012[16]). As a result, the domains where Czechia has decided to focus its innovation strategy are also in line with European priorities. Similarly, the innovation domains prioritised in the national Recovery and Resilience Plan (RRP) were established in line with the RIS3 goals and European goals more broadly.
Czechia is also taking part in many European RDI programmes. Czech SMEs can apply to EU-wide proposals organised by the SME Fund, such as the Ideas Powered for business SME Fund. They can apply for Horizon funding, either as part of a consortium or alone, such as in European Innovation Council (EIC) calls. Around 30 projects, either managed or proposed by Czech entities, had received financing from the EIC as of 2024.
Czechia has also tailored some of its innovation funding programmes to match European priorities and requirements. One example is CzechInvest’s decision to create sectoral hubs in RIS3 priority areas, aligning its strategy to regional, national and European priorities.
Nevertheless, Czechia could further integrate the European innovation funding system by providing more recognition to certifications such as the European Seal of Excellence. Czechia has used some of the RRP funding to provide financing to EIC Seal of Excellence holders through a programme managed by the Technology Agency of the Czech Republic (TA CR). However, the programme risks losing its funding when the RRP ends in 2027. Ensuring that Seal of Excellence holders have a streamlined procedure for accessing national innovation funds could save administration costs and provide high-quality innovators with the funds needed for development. This recognition could be in the form of a continuation of the existing TA CR programme or a simplification of the requirements for other national programmes. To avoid that this option puts newcomers at a disadvantage, authorities could focus on streamlining the process for winners from past funding rounds. Examples of steps in this direction could include the recognition of past documents, which would avoid duplicating documents for every application, and demanding only minimal documentation relevant for the next step (for instance, showing the future business and innovation plan and how that differs from past performance and funding).
On the other hand, Czechia’s SME Support Strategy could be better aligned with the European objectives of RDI investment. In 2021, Czechia’s total general expenditure on R&D (GERD) was 2% of GDP, one percentage point below the European Commission’s goal of 3% by 2030, and 0.1 percentage point below its own goal of 2.1% by 2021 (Council for Research, Development and Innovation, 2019[17]; European Commission, 2023[18]). Czechia could reach European targets by encouraging both more private and public R&D expenditure.
As seen in this chapter, Czechia could encourage more private RDI expenditure through tax incentives. As of 2024, the SME Strategy only encouraged private R&D activities in general terms, without mentioning the improvement in incentives to invest in such activities (e.g. tax incentives or improvements in the business environment). Czechia could better align with European policies by encouraging the take-up of existing R&D tax incentives by SMEs (see section above) or by developing new ones, heeding the European Commission’s encouragement of Member States to provide general tax-based incentives for RDI activities (European Commission, 2023[18]). The establishment of clear targets could further this goal, for instance aiming to double the amount of R&D spending by SMEs by 2030 or increasing SME’s use of existing tax incentives and thus reversing the decreasing trend since the mid-2010s.
Czechia could also encourage private innovation more explicitly by providing a framework for regulatory sandboxes. Regulatory sandboxes are regulatory regimes that simplify regulation for new technologies, typically for a limited period, encouraging innovation while ensuring a minimum standard of safety. Examples include the United Kingdom’s 2015 regulatory sandbox for FinTech innovation or newer sandboxes that encourage innovation in the area of artificial intelligence (OECD, 2023[19]; Cornelli et al., 2023[20]). The European Commission encourages such sandboxes, as they provide a controlled environment for the development of new technologies (European Commission, 2021[21]; European Commission, 2023[18]).
Czechia’s innovation performance is close to the EU average, but business R&D spending remains relatively low, particularly among SMEs. In 2023, Czechia ranked 14th in the European Commission’s Innovation Scoreboard, outperforming other Central and Eastern European countries like Poland, Slovakia and Hungary. However, business R&D spending is below the EU average, with SMEs accounting for only around one-quarter of the total.
Czechia benefits from an integrated innovation strategy thanks to the national Smart Specialisation Strategy, which identifies the main priority technology areas at the national level. Most public institutions involved in innovation policy abide by this prioritisation exercise, which contributes to the overall strategic coherence of government RDI programmes in Czechia.
Public RDI funding has increased in recent years, mostly thanks to external EU sources. External R&D funding rose from 0.44% of GDP in 2017 to 0.61% in 2021, while domestic public funding remained stable at around 0.6% of GDP. However, the proliferation of programmes across multiple funding streams increases complexity and administrative burdens for SMEs. Further streamlining could improve accessibility, although this might require the merger of some of the Czech Operational Programmes, as most public innovation funding comes from EU sources.
Private RDI investment could be further stimulated through more effective tax incentives. The existing R&D tax credit policy does not provide applicants with a strong degree of certainty about the outcome and only benefits profitable firms. Clearer rules and a shift towards a payroll-based R&D tax credit could lower innovation costs, improve liquidity, and strengthen take-up, especially by SMEs. Czechia could also strengthen industry-university linkages by providing more stable funding for technology transfer offices and piloting applied PhD programmes.
Against this backdrop, the following policies could further strengthen the innovation performance of Czech SMEs.
Streamline existing grant and voucher programmes into fewer larger programmes, including multi-stage funding programmes, to follow innovations and innovators across different technology readiness levels.
Encourage more private RDI funding, notably by reforming the existing R&D tax credit. Changes would include a more lenient application of the rules defining innovation (and/or a clearer list of eligible costs), a longer carry-forward period (e.g. 5 to 10 years), and changing the tax base of the allowance from corporate income tax to a tax credit on R&D-related labour costs. All these three measures could further favour SMEs through preferential conditions for smaller companies (e.g. longer carry-forward periods).
Invest more proactively in industry-university knowledge transfer by boosting the funding of technology transfer offices (TTOs) and/or creating a pilot Industrial PhD programme.
Encourage capacity building for innovation through government-sponsored business consulting services for SMEs and entrepreneurs.
Continue developing regional innovation centres by ensuring adequate funding and staffing so that these centres can build strong regional innovation systems over time, including by working with universities, technology centres, financiers and other relevant stakeholders.
Set and monitor clear goals for R&D expenditure by SMEs, consistently with the objectives set in the national innovation strategy.
References
[17] Council for Research, Development and Innovation (2019), Innovation Strategy of the Czech Republic 2019-2030, https://www.czechia.eu/wp-content/uploads/2021/11/INNOVATION_STRATEGY_CR_2019-2030_web2.pdf.
[9] Czech Statistical Office (2024), Tax Support for Research and Development in the Czech Republic 2022.
[25] Czech Statitistical Office (2022), Tržby za inovované produkty, https://csu.gov.cz/docs/107508/49e33d1a-8247-fdfb-7807-2852e5fb373d/21300324a5.pdf?version=1.0.
[15] CzechInvest (2024), Incubators and Accelerators, https://www.czechstartups.org/en/startup-ecosystem/incubators-and-accelerators/.
[6] European Commission (2024), Reciovery and Resilience Scoreboard. Thematic Analysis Research and Innovation, https://ec.europa.eu/economy_finance/recovery-and-resilience-scoreboard/assets/thematic_analysis/scoreboard_thematic_analysis_research_and_innovation.pdf.
[1] European Commission (2023), European Innovation Scoreboard 2023, Publications Office of the European Union, https://data.europa.eu/doi/10.2777/119961.
[18] European Commission (2023), Long-term competitiveness of the EU: looking beyond 2030, https://commission.europa.eu/document/af444130-5a3e-44f2-bea6-5b9ddcb46012_en.
[21] European Commission (2021), Proposal for a Regulation of the European Parliament and of the Council Laying Down Harmonised Rules on Artificial Intelligence (Artificial Intelligence Act) and Amending Certain Union Legislative Acts, https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1623335154975&uri=CELEX%3A52021PC0206.
[16] European Commission (2012), Guide to Research and Innovation Strategies for Smart Specialisation, https://s3platform.jrc.ec.europa.eu/en/w/guide-on-research-and-innovation-strategies-for-smart-specialisation-ris3-guide-.
[10] Eurydice (2024), Higher Education Funding in Czechia, https://eurydice.eacea.ec.europa.eu/national-education-systems/czechia/higher-education-funding.
[2] Grassano, N. et al. (2022), The 2022 EU Industrial R&D Investment Scoreboard, https://data.europa.eu/doi/10.2760/08410.
[24] Masaryk University (2024), Annual Report Masaryk University 2023, https://www.muni.cz/media/3767418/vyrocni_zprava_o_cinnosti_mu_2023_en.pdf.
[12] Ministry of Industry and Trade (2024), Final evaluation of the TRIO programme.
[7] Ministry of Industry and Trade (2024), National Research and Innovation Strategy. Annex 3 - RIS3 objectives, monitoring indicators and funding.
[4] OECD (2024), Strengthening FDI and SME Linkages in Czechia, OECD Publishing, Paris, https://doi.org/10.1787/4c97d104-en.
[22] OECD (2023), OECD R&D tax incentives database, 2022 edition, https://one.oecd.org/document/DSTI/STP/NESTI(2023)2/FINAL/en/pdf.
[3] OECD (2023), OECD SME and Entrepreneurship Outlook 2023, OECD Publishing, Paris, https://doi.org/10.1787/342b8564-en.
[19] OECD (2023), “Regulatory sandboxes in artificial intelligence”, OECD Digital Economy Papers, No. 356, OECD Publishing, Paris, https://doi.org/10.1787/8f80a0e6-en.
[13] OECD (2021), “Improving knowledge transfer and collaboration between science and business in Spain”, OECD Science, Technology and Industry Policy Papers, No. 122, OECD Publishing, Paris, https://doi.org/10.1787/4d787b35-en.
[5] OECD (2015), Frascati Manual 2015: Guidelines for Collecting and Reporting Data on Research and Experimental Development, The Measurement of Scientific, Technological and Innovation Activities, OECD Publishing, Paris, https://doi.org/10.1787/9789264239012-en.
[20] Parlour, C. (ed.) (2023), “Regulatory Sandboxes and Fintech Funding: Evidence from the UK”, Review of Finance, Vol. 28/1, pp. 203-233, https://doi.org/10.1093/rof/rfad017.
[11] Research, Development and Innovation Council of Czechia (2024), Evaluation of research organizations and evaluation of programmes of targeted support for research, development and innovation according to the M17+ Methodology, https://hodnoceni.rvvi.cz/recapitulative-reports/.
[23] Technology Agency of the Czech Republic (2024), Annual Report 2023, https://tacr.gov.cz/wp-content/uploads/2024/05/TA-CR_Annual-report-2023_ENG.pdf.
[8] Technology Agency of the Czech Republic (2024), Programme to Support Applied Research and Innovation SIGMA, https://tacr.gov.cz/wp-content/uploads/documents/2024/05/07/1715070046_SIGMA%20Programme%20since%207.9.2023.pdf.
[14] The Science and Technology Parks Association of Czech Republic (2024), Interactive catalog of Science and Technology Parks in Czech Republic, https://www.svtp.cz/en/.
← 1. The minimum R&D spending required for entering the 2022 EU industrial R&D investment scoreboard was EUR 48.5 million in 2021 (Grassano et al., 2022[2]).
← 2. The list of key enabling technologies (KETs) is: (i) photonics and micro/nano electronics, (ii) advanced materials and nanotechnologies, (iii) advanced manufacturing technologies, (iv) life science technologies and biotechnologies, (v) artificial intelligence, and (vi) digital security and connectivity. The list of specialisation domains is (i) advanced materials, technologies, and systems, (ii) digitalisation and automation of manufacturing technologies, (iii) electronics and digital technologies, (iv) environmentally-friendly transport, (v) technologically advanced and safe transport, (vi) advanced medicine and drugs, (vii) cultural and creative industries, (viii) green technologies, bioeconomy and sustainable food sources, (ix) smart cities and municipalities. The full text of Czechia’s Smart Specialisation Strategy can be found here: https://www.ris3.cz/sites/default/files/National-RIS3-Strategy_2.pdf.
← 3. An example of a call for proposals can be found here: https://www.agentura-api.org/wp-content/uploads/2024/01/inovacni-vouchery-vyzva-i-web-3.pdf.
← 4. The implicit tax subsidy rate is defined as 1 minus the B-index. The B-index is the pre-tax income that a representative firm requires to break even of an extra unit of R&D expenditure. A B-index below one suggests that the tax system treats R&D expenditure preferentially, for instance through extra allowances, R&D tax credits or accelerated depreciation. For simplicity, this indicator is usually presented in the form of the implicit subsidy rate, i.e. the difference between a pre-tax income of one euro and the break-even value of the one extra euro of R&D. The higher this value, the higher the subsidy (OECD, 2023[22]).
← 5. This is the direction that Czech authorities have chosen. Since 2024, they have broadened the type of evidence that firms can provide to prove that their expenses are meant for R&D.
← 6. For instance, in 2023, the Technology Agency had disbursed EUR 237 million in targeted funding for applied research and innovation, with three-quarters (73%) designed to encourage the collaboration between companies and universities and half (54%) aiming to encourage the collaboration between SMEs and universities (Technology Agency of the Czech Republic, 2024[23]). Nevertheless, these funds are relatively small compared to the annual budget of universities. For instance, in 2023, only Masaryk University, Czechia’s second largest, had a budget of EUR 400 million, double that of the Technology Agency (Masaryk University, 2024[24]).
← 7. The eight performance indicators measure: a) the graduation rate, b) international mobility, c) graduate employment, d) research performance, e) contributions to the arts, f) external revenue, g) studying in a foreign language, and h) the proportion of foreign students.
← 8. For more information about Czech firms’ innovative activity, see Czech Statitistical Office (2022[25]).
← 9. TRLs range from 1 (idea and basic principles) to 9 (full commercial application), with 5 being indicating that a technology has been validated in the relevant environment (e.g., in an industrial environment for KETs). TRLs 4 to 7 are more likely to fall in the “valley of death”, as they are too applied for basic research funding and too risky for private financing.
← 10. There are already some public procurement for innovation programmes, such as TA CR’s BETA programme, but Czechia could consider a more global procurement strategy for encouraging innovation, especially among SMEs.
← 11. For more information about the Innovative Solutions Canada, see the programme’s Annual Report: https://ised-isde.canada.ca/site/innovative-solutions-canada/en/innovative-solutions-canada-annual-report-2022-23#9
← 12. You can find more information on TIPS’ website: https://www.jointips.or.kr/about_en.php.