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Research and Development

Labour costs in the V4 countries have risen during the last two decades and have converged on EU15 levels. High labour cost countries can only compete in the increasingly globalised economy if they are specialised in industries that require high knowledge content, high qualification levels and expertise in the labour force. Investments in the knowledge economy increased in the v4 countries, but were far from matching those in the EU15 countries. This is critical because, in the long term, economic growth is primarily defined by technological progress and the accumulation of human capital, which determines the way and the speed at which technological progress penetrates the economy. The three most important issues are the availability of research funding and supply of highly skilled researchers; the creation of a functional national system of innovation; and high shares of innovative enterprises. The V4 countries have struggled with all three elements. R&D was weak under state socialism, due to the preponderance of basic versus applied research (Zon 1996). R&D continued to be relatively weak after 1989, and a Commission of the European Communities report (1995) attributed this to several factors: sharp reductions in public expenditure generally, including R&D; brain drain of highly skilled researchers; short termism in the private domestic sector, exacerbated by the struggle for survival following the sharp shock economic reforms; and the reliance of MNCs on external R&D.

Following EU accession, the V4 countries experienced four major trends. First, there has been an overall increase in gross expenditure on R&D (GERD) in both the EU and the V4 group, including the period of economic turmoil. Some governments have supported business expenditure on R&D (BERD) with tax breaks and grants. The V4 countries had higher growth in GERD compared to the EU28 average, while this stagnated in Greece, Portugal and Spain in the same period. The GERD levels in the V4 countries, however, increased from relatively low levels. The Czech Republic had the most impressive growth in GERD amongst the V4 group, while Slovakia resembled Malta, Cyprus, Romania and Greece in having low growth in GERD.

Second, business expenditure on R&D (BERD) also grew both in the EU28 and V4 in 2008-2013. The Czech Republic and Hungary, in particular, reported high growth in BERD, with the branches of MNCs and domestic firms having broadly similar importance in this. In Poland and Slovakia, expenditure by domestic companies contributed more than MNC expenditure to BERD. The southern EU members, on the other hand, had relatively low inward flows of foreign finance in the business sector.

Third, public expenditure on R&D (government + higher education institutions) decreased in 2008-2013 in the EU28. There were significant cuts in R&D in Spain and Italy in particular, associated with significant reductions in public spending. Public expenditure on R&D has stagnated in Hungary, Poland and Slovakia since 2009, and Slovakia ranked bottom amongst the EU28. The Czech Republic, on the other hand, had the fastest growth of public expenditure on R&D in the EU28 in 2009-2013. Public expenditure on R&D was also affected by cuts in government budgets in Spain, Portugal and Greece.

Fourth, the importance of external international sources of funding for R&D has increased in the V4 countries in the last 10 years. Foreign resources (foreign firms and international organisations) generated about

20% of total GERD in the V4 countries. The Czech Republic in particular had strong growth in such sources, of which two thirds was from the European Commission and one third from foreign companies. The European Commission provided for over 60% of foreign funding in Poland and Slovakia, but also in Greece, Portugal and Spain in early 2010s. The Hungary was rather exceptional, as two thirds of its foreign funding was provided by foreign enterprises in the same period.

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