RDI MIRROR 1. Review on the ICT Sector 2012 RDI MIRROR 1. Review on the ICT Sector Budapest, 2013 This publication was made under the auspices of the National Innovation Office RDI Observatory Department. Prepared by: Attila Csôke Tibor Flamich Julianna Ifju-Keresztes Ádám Mészáros Bence Rapkay István Szabó This publication may only be quoted either in part or in whole by properly referencing the source. The National Innovation Office shall not be held liable for any consequences resulting from using this analysis for any purpose. Table of contents Introduction 7 1. The ICT sector's stakeholders, inputs and significance for the national economy 8 1. 1 Definition of the ICT sector 8 1. 2 The role and competitiveness of ICT in the EU 9 1. 3 The significance of the ICT sector in the Hungarian national economy 11 1. 4 Value added 12 1. 5 Export and import performance 13 1. 6 Number and size of ICT businesses 15 1 7 Rate of employment 18 1. 8 International outlook 19 2. R&d performance of the ICT sector 20 2. 1. Number of research units 20 2. 2. R&d expenditure, investment and cost 20 2. 3. Number of people employed in R&d 23 2. 4. Regional distribution of ICT research and development personnel 24 2. 5. Patents international comparison 26 2. 6. Innovative ICT businesses 27 2. 7. Tender system: grant agreements and awarded amounts 29 Summary 33 Bibliography 35 List of Figures 36 National Innovation Office 38 Kaleidoszkóp 38 Introduction The first sectoral report released by the National Innovation Office RDI Observatory examines the relationship between the Information Communication (ICT) sector and Research, Development and Innovation (RDI. The ICT sector became the focus of attention for a good reason. The analyses included in our publication entitled‘Status Report on Enterprise RDI'released in the Spring of 2012 clearly demonstrated that ICT has RDI potential which definitely merits further investigation. The economic weight and R&d potential of the ICT sector from several aspects outperforms that of other sectors characterised by similarly potent research activity (e g. in terms of added value contribution to the national economy and the number of people employed in research and development. At the same time, if we take a look at its R&d expenditure or investment and resource requirement, we find that all those indicators are far more modest than in other sectors, consequently the ICT sector is capable of generating high added value even at relatively low levels of investment. It is also common knowledge that the ICT sector is characterised by very significant multiplicator impacts, given that practically all forms of economic activity rely on ICT products and services, thereby the ICT sector plays an important role in significantly improving the efficiency and productivity of other sectors, and so their economic competitiveness. In view of the above, the ICT sector may be regarded as a breakout point for Hungary: it is defined as an engine of growth by the Hungarian Growth Plan, moreover the New Széchenyi Plan does not only see it as basic infrastructure, but also emphasises the importance of providing targeted support for ICT innovation. Yet, there appears to be a sector-specific problem here, inasmuch as often not even those achieving outstanding ICT research and development results realise that what they are doing does in fact amount to R&d, because coming out with new developments all the time is an intrinsic part of how the sector operates, therefore, not even those directly involved are necessarily conscious of their own R&d activity. This publication aims to bring ICT stakeholders up-to-date with the current status of RDI in their own sector and to increase awareness among public administration decision-makers of the breakout points potentially represented by RDI in Hungary. We sincerely hope that this publication will be helpful in developing a better understanding of the ICT sector's full potential. In the near future, new reports will be coming out on the analogy of this one, analysing the RDI situation in other sectors. 1. 1 Definition of the ICT sector Because the ICT sector encompasses an extremely wide range of activities, it is not easy to separate it from other sectors. The definition of the ICT sector provided by the Frascati Manual based on ISIC Rev. 3 (pp. 159-160) lists a number of key sectors (presented in a relatively detailed four-digit breakdown) whose main activity is production and marketing of ICT products or services. At the same time, the Manual makes note of the frequent non-availability of sufficiently detailed data, and for that very reason it suggests that certain simplifications ought to be made when analysing ICT related R&d activities. However, a classification system based on the above unfortunately does not always work as such detailed data are unavailable for most types of statistical data sets. For the same reason, our report treats the ICT sector as being made up of sectors and subsectors representing two distinctive branches of the national economy: the processing industry on the one hand and the services industry on the other. Hereinafter, we shall respectively refer to these as the‘ICT industry'and‘ICT services'.'According to a harmonised Statistical Classification of Economic activities in the European community (in Hungary: TEÁOR'08), we categorised available data as follows: ICT Industry: Section C (Manufacturing: C. 26: Manufacture of computer, electronic and optical products C. 26.1: Manufacture of electronic components and boards C. 26.2: Manufacture of computers and peripheral equipment C. 26.3: Manufacture of communication equipment C. 26.4: Manufacture of consumer electronics C. 26.5: Manufacture of instruments and appliances for measuring, testing and navigation; watches and clocks C. 26.6: Manufacture of electromedical equipment C. 26.7: Manufacture of optical instruments C. 26.8: Manufacture of magnetic and optical media ICT Services: Section J (Information and communication) J. 58: Publishing activities J. 59: Motion picture, video and television programme production, sound recording and music publishing activities J. 60: Programming and broadcasting activities J. 61: Telecommunications J. 62: Computer programming, consultancy and related activities J. 63: Information service activities As our approach is aligned with the underlying logic of the Frascati Manual, which divides the ICT sector into manufacturing and services, and as the sectors listed above are largely identical with the classification proposed therein, our analysis provides a solid basis for determining the economic weight and RDI performance of the ICT sector. Occasionally, less data is available on the ICT manufacturing as some statistical databases fail to subdivide this section of the national economy into further sectors and subsectors, and so our analysis was encumbered by the non-availability of sufficiently detailed data. We nevertheless endeavored to present the fullest possible picture of both the ICT industry and ICT services as far as it was possible. 1. The ICT sector's stakeholders, inputs and significance for the national economy 8 ICT tools and services play an important role in building a digital single market, which presents a significant growth potential for the EU. The European commission's'Annual Growth Survey'released in 2011 December sees the building of a digital single market as a source of significant growth; ICT tools and services have a pivotal role in unlocking this potential. The survey highlights-among other things-the importance of establishing secure mobile and online payment systems, making available more radio spectrums (in particular for the mobile data market), investing into high-speed broadband connections, the role of online purchases in reducing costs and improving the quality of delivery of goods and services, and developing online dispute resolution systems (to provide fast and reliable arbitration to consumers and businesses in case of dispute). According to the survey, using the power of ICT is the key to delivering smart energy and transport systems linking all corners of the EU, as‘the widespread use of smart electricity grids, a high level of energy efficiency and renewable energy sources made possible by a sophisticated use of information and communication technologies and world-class logistics servicing the internal market are essential components of a modern, competitive economy and crucial for EU development in the coming years'(European commission 2012. pp 8 ). In all-sectoral comparison, ICT companies are the biggest investors in the EU, the USA and Japan. The EU's‘Innovation Union Competitiveness Report 2011'stresses that innovation in the ICT sector and the ICT-enabled innovation in non-ICT industries and services make a significant contribution to the economic growth of advanced economies. Its significance was highlighted both in the EU Lisbon Objectives and in the Europe 2020 Strategy, and for a good reason, as the biggest investors in the EU, the US and Japan are ICT companies. In 2002-2007 the ICT sector accounted for a quarter of overall BERD1 in the EU (outperforming both car manufacturing and the pharmaceutical industry/biotechnology) and employed about third of all business-sector researchers. In the EU ICT services contributed 3/4 of total ICT value added and employed 2/3 of the workforce. At the same time, the ICT sector is partly the reason why EU companies have fallen behind in R&d: as the above quoted Competitiveness Report also points out, the European ICT sector is partly to blame for the significant disparity which has evolved between the US and the EU, as shown by their respective business R&d intensity. 9 1. 2 The role and competitiveness of ICT in the EU 1 Business Expenditure on Research and development: the research and development expenditure of companies National Innovation Office RDI MIRROR-1. Review on the ICT Sector European ICT is significantly falling behind its main competitors both in terms of value added and in terms of the two key R&d indicators shown in Figure 1. However, by comparing the R&d intensity of individual sectors we get a rather more diverse picture: while the EU's BERD/value added ratio of telecommunication services is no worse than that of the US, the EU has a big backlog in IT services and software manufacturing (both compared to the US and South korea), while the EU and South korea have similar indicators in terms of the manufacture of telecommunication and multimedia equipment and components. In several key indicators the EU's ICT sector is not sufficiently competitive relative to its main rivals (Japan and USA. Company-level R&d data clearly demonstrate that fewer new and innovative large ICT corporations are created in the EU than in the US. It is particularly true for the most dynamic engine of growth within the sector: computer services and software manufacturing. As a further disadvantage, US companies were quicker to recognize the significance of Asia and started R&d cooperation with Asian companies sooner than their European counterparts. Moreover, the ICT sector's share in registered patents is significantly lower in the EU than in the US. Out of the EU's total ICT sector value added, Germany, France, the United kingdom, Italy and Spain account for over 70, %however, the best relative (to their population) performers in ICT are the Nordic countries. Among the new member states, Hungary, the Czech republic and Poland recorded significant increases in ICT manufacturing employment however, deeper analysis shows that these countries are still hosting rather low-value added activities. 1. The ICT sector's stakeholders, inputs and significance for the national economy 10 Figure 1: The EU's ICT sector in international comparison (2007. Source: European commission: EU Innovation Union Competitiveness Report 2011.0%2%4%6%8%10%12%14%16%18%ICT BERD(%of GDP) ICT Value Added(%of GDP) ICT BERD to ICT Value Added(%)EU USA Japan South korea Taiwan In summary as Ernst&young's paper on European innovation2 also points out while in a number of sectors the EU outperforms both Japan and the United states, it has worse competitive indicators than its rivals in some other technology-intensive industries and, as a result, in a number of ICT areas. 1. 3 The significance of the ICT sector in the Hungarian national economy As individual branches of the economy are interrelated through many ripple effects, quantifying so-called multiplicator factors is not easy. Individual sectors can have an influence on other segments of the national economy in a number of different ways going beyond simple buyer-supplier relationships, e g. through the flow of technology. This makes it almost impossible to determine the precise weight or significance of any sector in a national economy, or its impact on other sectors, as well as to quantify any of these influences. It would be similarly hard to fully grasp every aspect of the ICT sector, therefore, we will give only two examples evidencing that the sector is having a particularly strong impact on the rest of the national economy. A large part of labour productivity growth in Hungary comes from the ICT sector. The ICT sector is a significant boost3 to labour productivity: it is estimated by OECD that labour productivity in Hungary improved year-on-year by an average 3. 1%in 1995-2008, from which National Innovation Office RDI MIRROR-1. Review on the ICT Sector11 2 The Power of Simplicity Toward a smarter and streamlined innovation policy in the EU 3 Average cost of labour per unit of output Figure 2: Annual average labour productivity growth and ICT contribution to such growth in total industries, 1995-2008(%.%Source: OECD Key ICT Indicators, 2012.0%1%2%3%4%5%Slovakia Hungary Czech republic Sweden Finland USA Austria Germany Average annual growth of labour produchvity excl. the ICT sector The ICT sector's contribuhon to the growth of labour produchvity 0. 5%(i e. nearly sixth of total growth) was due to impacts from the ICT sector. Albeit to different degrees, the ICT sector played an important role in improving efficiency in all countries under review, and the value for Hungary is even better than similar indicators of most countries, even though it falls short of similar indicators for Finland and Sweden, the absolute leaders in this regard. In most OECD member countries under review, ICT investments generate more economic growth than investments made by all other sectors combined. Based on 2000-2009 data, the OECD also evaluated the contribution of ICT investments to economic growth. In the United kingdom, the US, Germany, Japan, Denmark, New zealand, Belgium, The netherlands, Sweden, Switzerland, Austria and Finland ICT investments made a bigger contribution to economic growth than investments in all other sectors combined. In other countries under review (Australia, Canada, Spain, France, South korea, Portugal, Ireland, Italy and Germany) the growth impact of ICT investments is weaker but not at all insignificant. It is clear that the ICT sector has beneficial effects pointing far beyond itself; and even though the scope of this publication does not allow us to go deeper into analysing the above impacts, the topic itself definitely merits further investigation. 1. 4 Value added The ICT sector is seen as an engine of global economic growth, whose weight increased considerably in recent years (see value added indicators in Figure 3) . Even though the sector was too hit by the economic downturn, for example, large IT corporations globally were forced to cost-cutting and downsizing their workforce, and the Hungarian business software development market shrank in size like many others, nevertheless the sector itself very quickly returned to the path to recovery, partly due to the highly innovative nature of its companies and to the growth of some sub-sectors, e g. computer and mobile communication services. In 1995-2008 the share of domestic ICT value added in the business sector value added showed remarkable growth, which put the Hungarian ICT sector in the top league of international market players. 12 Figure 3: Share of ICT value added in the business sector value added, Source: OECD Key ICT Indicators, 2012. There is no data available for Poland 1995) 1. The ICT sector's stakeholders, inputs and significance for the national economy 0%2%4%6%8%10%12%14%16%Poland Austria Germany Portugal Slovakia France OECD average Czech republic USA Hungary Sweden Finland 1995 2008 Finland Sweden USA France Slovakia Portugal Germany Austria Poland Czech Republik OECD average Hungary While in 1995 the share of the entire ICT sector of total gross value added at level of the national economy stayed below 4, %by 2011 it practically doubled its relative weight, nearly 3/4 of this performance being generated by ICT services. This growth was interrupted not even by the recession that began to unfold in 2008; on the contrary, in 2009 the sector managed to significantly increase its relative share (to some extent due to the decline of several other sectors), which resulted in a slight increase of sectoral gross value added. It must be noted, however, that this was made possible by ICT services, as in 2009 the gross value added of the ICT industry declined, however slightly. In 2011 the share of ICT services marginally declined despite a nominal increase in their value added; however, based on preliminary GDP figures for 2012, the performance of ICT services is on the rebound. The Hungarian ICT sector has achieved substantial growth although its expenditure level is significantly lower than the OECD average. Notably, the Hungarian ICT sector has achieved outstanding growth even in international comparison despite its expenditure levels lagging behind the OECD average. 1. 5 Export and import performance In Hungary the ICT industry accounts for more than a quarter of all manufacturing exports. The ICT industry is the most important export sector within manufacturing: it accounted for 26.6%of Hungarian manufacturing exports in 2011. This puts it ahead of the automotive industry, which had an 18%share, or even the 13 Economic recovery in the ICT sector Many lessons can be learnt from the findings of the research conducted by the National Innovation Office in August 2012 among members of the Hungarian Association of IT Companies (IVSZ). Even though the research was not based on representative samples, the ways in which companies responded to the crisis offer many sector specific yet forwardlooking lessons. Nearly all respondents said they were able to weather the crisis by market launching a new product and/or service, but exploring new markets and improving efficiency also came high among the answers (in addition to the cost cutting and redundancy methods widely used in other sectors). Figure 4: Gross value added of the Hungarian ICT sector as a percentage of value added of the total economy, 1995-2011. Source: Hungarian Central Statistics Office 0%1%2%3%4%5%6%7%8%9%1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 ICT services ICT industry National Innovation Office RDI MIRROR -1. Review on the ICT Sector pharmaceutical industry, whose share was only 4. 5%.The sector stood above all other sectors of the manufacturing despite a significant drop in its foreign trade turnover (and relative share) by 2011. Notwithstanding the above, in 2011 the ICT sector's positive impact on the country's balance of trade surpassed even the (already extremely high) levels of recent years. ICT exports declined due to a decrease in consumer electronics exports while the share of telecommunications equipment, which made up nearly 50%of sectoral exports in 2011, remained similar to its 2010 level. The export of computers and peripheral equipment-equally crucial for ICT-has shown a steady growth in absolute terms since 2009. Declining imports in 2011 were mostly related to telecommunications equipment (42.6%share in 2011) and electronic components (representing 22.6%).%)The ICT sector generates a large surplus in international trade. The ICT service sector's contribution to international trade is represented relatively well by statistical data published by the Hungarian Central Statistical Office on communication services as well as IT and information services4. The ICT sector had a 7. 8%share from total service exports and 7. 5%from imports in 2011 respectively, resulting in a surplus of over HUF 82 billion. Figure 5: Balance of trade in the ICT industry and its share from Hungarian manufacturing industry exports and imports in 2008-2011(%.%Source: Hungarian Central Statistical Office 14 4 Note, however, that trade in services is accounted for somewhat differently compared to the logic we adopted so far. The Hungarian Central Statistical Office's trade-in-services datapool classifies postal and courier services as communication services; whereas computer services, news agency services, database services and online publishing are classed as IT and information services. Foreign market entry opportunities The bulk of primary data shown in the text boxes of this report were taken from an RDI survey carried out by the National Innovation Office RDI Observatory in the spring of 2012 with the participation of 1 , 618 Hungarian businesses. The research focused mostly on analysing research and development as well as innovation performance mostly of business partnerships, and to a smaller extent of nonprofit organisations and research institutes with RDI function. Respondents included 280 companies with a (mainly or exclusively) infocommunication (ICT) profile. The survey revealed that companies engaging in R&d tend to have a very strong international sales focus 51%of companies under review sell their products to European markets, and 33.9%of them have market presence in countries outside Europe. Even though the same ratios are somewhat lower for ICT companies (43.3%and 26.2%respectively), their indicators still significantly outperform the average foreign market activity of Hungarian companies..1. The ICT sector's stakeholders, inputs and significance for the national economy 1150 1200 1250 1300 1350 1400 1450 1500 1550 1600 0%5 %10%15%20%25%30%35%2008 2009 2010 2011 bln HUF Balance of trade (right axis) Share in total exports (led axis) Share in total imports (led axis) The trade volume of computer and information services is nearly twice as much as that of communication services; in addition to which the computer and information services sector also recorded a major trade surplus in contrast with communication services, which is characterised by a relatively small but increasing trade deficit. 1. 6 Number and size of ICT businesses In the space of seven years, the number of business enterprises in the ICT services sector has grown by 14.7, %however, the total number of business enterprises decreased. The size of the ICT services sector can be illustrated by the total number of business enterprises5 making up the sector, which shows a steady 14.7%rate of increase since 2003 with only one minimal interruption to 2010. This is particularly impressive considering that however slightly, the total number of business enterprises making up the national economy declined. There were altogether 708,307 active enterprises in Hungary in 2004 compared to 696,680 in 2010. Figure 6: Balance of trade in ICT services (HUF bln) and their relative proportion within the import and export of services(%)in 2008-2011. Source: Hungarian Central Statistical Office 5 In any given year, a business enterprise is classified as‘active 'if it generates sales revenue or employs one or more staff during that year (Hungarian Central Statistical Office). Figure 7: Number of business enterprises in the ICT sector, 2003-2010. Source: Hungarian Central Statistical Office 15--40--20 0 20 40 60 80 100 120--3%--1%1%3%5%7 %9%2008 2009 2010 2011 bln HUF Balance of trade in informa? on technology and computer services (right axis) Balance of trade in communica? on services (right axis) Export of informa? on technology and computer services (lek axis) Import of informa? on technology and computer services (lek axis) Export of communica? on services (lek axis) Import of communica? on services (lek axis) 0 5, 000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 2003 2004 2005 2006 2007 2008 2009 2010 ICT in total ICT services ICT industry National Innovation Office RDI MIRROR-1. Review on the ICT Sector However, the two subsectors that make up the ICT industry are characterised by outright inverse dynamics: as the number of service provision business enterprises dynamically increased, the number of active businesses with a manufacturing profile has declined steadily since 2005. Further investigation is needed to reveal the causes of this process. The relative proportion of companies providing ICT services is rising, and it is now many times higher than the number of companies in the ICT industry. Based on 2010 data and the standard national economic sector classification, the highest number of active businesses are engaged in the wholesale and retail trade, repair of motor vehicles (139,546 out of a total of 700 000 active businesses), followed in second place by professional, scientific and technical activities (109,881 companies), and then the construction industry (66,033 companies). In 2010, information and communication (i e. ICT services) came seventh in the ranking of various branches of the national economy according to the number of active businesses involved (34,371 companies in total. The ranking of various branches of the national economy based on the number of active businesses involved was identical already back in 2003 in the top six spots. While in 2003 the ICT services sector (i e. the Information and Communication Technology branch of the national economy) still ranked only 9th, it has stopped never climbing, moving to 8th in 2006, to 7th in 2007, which position it has retained ever since. The proportion of newly established businesses with an ICT service profile among all startup businesses6 was 4. 5%on average in the period between 2003-2009 while from all shutdowns 3. 6%were ICT businesses7 on average, which explains the growing relative proportion of ICT service companies within the total pool of companies. 1. 16 Close cooperation with other companies engaged in R&d The scope of the National Innovation Office RDI Observatory's RDI survey also involved looking at partnerships between respondent companies and other organisations. Based on the answers, a much higher rate of ICT companies than other companies engaged in R&d are looking for partners on the‘open market',at the same time, fewer ICT companies cooperate with local and overseas research institutes than companies from other sectors. Figure 8: Breakdown of respondent companies'answers to the question‘Which organisations are you in (regular, close) liaison with?'.'Source National Innovation Office RDI Observatory's survey, 2012 6 A business enterprise is categorised as a startup enterprise in any given year if in that year it is part of the pool of active companies, whereas in the previous two years it did not have an active status. Entities with a legal predecessor are classed not as de facto new formations. Hungarian Central Statistical Office) 7 A business enterprise will be classed as a terminated enterprise in any given year if, for two consecutive years, it was not part of the pool of active companies. Entities terminated with a legal successor are classed not as de facto terminated enterprises. Hungarian Central Statistical Office) The ICT sector's stakeholders, inputs and significance for the national economy 0%10%20%30%40%With overseas research ins4tutes With overseas educa4on ins4tu4ons With Hungarian research ins4tutes With NGOS suppor4ng R&d ac4vi4es (e g. founda4ons) With large companies engaged in R&d With small or medium size companies engaged in R&d With Hungarian higher educa4on ins4tu4ons ICT other sectors 17 Figure 9: Breakdown of active business enterprises by sector and branches of the national economy, 2010. Source: Hungarian Central Statistical Office Figure 10: Distribution of ICT companies according to corporate life cycle. Source: National Innovation Office RDI Observatory's survey, 2012 Figure 11: Distribution of ICT companies based on their current development phase in terms of R&d. Source: National Innovation Office RDI Observatory's survey, 2012 What is the current life cycle of Hungarian companies engaged in R&d? In regard to the life cycle of companies, the National Innovation Office RDI Observatory's survey indicates that only a small proportion of ICT companies are in the start-up/learning phase of their development, more than half of them see themselves in a development/expansion stage, a good third of them are mature/stagnating and only 5%are declining/phasing out. The R&d potential of ICT companies is illustrated also well by the fact that 15.4%of them have an R&d function in the start-up-learning phase, more than half of ICT companies are still developing, expanding, a good fifth reported a mature-stagnating R&d function and only a very small proportion of companies have reached a phase of decline. Other companies engaged in R&d are characterised by similar percentage rates. 6. 1%52.5%36.4%5%Start-up/Learning Developing/Expanding Mature/Stagna? ng Declining/Phasing out 15.4%58.2%22.1%4. 3%Start-up/Learning Developing/Expanding Mature/Stagna? ng Declining/Phasing out National Innovation Office RDI MIRROR-1. Review on the ICT Sector 20%15.8%9. 5%7. 2%5. 5%5. 3 %4. 9%0. 2%4. 6%27%Wholesale and retail trade, repair of vehicles Professional, scientific and technical activities Construction industry Manufacturing industry (excl. ICT industry) Administrative and support service activities Other services ICT services ICT industry Hotel accomodation and hospitality Other sectors in total If we look at ICT services sector companies in terms of size, we find an over-dominance of micro-businesses employing 1-9 people. The share and number of SMES is very low and less than 0. 001%of businesses employ more than 250 people. Small, medium and large companies account for 11.4%of all businesses in the ICT industry, while the rate is only 2. 4%in ICT services. Small and medium-sized businesses represent a higher proportion of all businesses in the ICT industry, yet there is a surprisingly high number and proportion of micro-businesses in this segment. Although the number of companies in ICT services is over twenty times higher than in ICT manufacturing, both sectors have roughly the same number of large companies (37 in industry and 40 in services). At the same time, it must be noted that many companies have no employees or their size is unknown, something which could distort the statistical result to a certain extent. 1. 7 Rate of employment Since the beginning of the 2000s, we have seen a significant and dynamic increase in the number of people employed in the ICT sector. The ICT sector has a major role on the labour market: In 2011 the ICT industry employed 94,800, while the ICT services 91,800 people. The ICT industry was hit particularly hard by the downturn, but in 2011 the size of its workforce exceeded 2008 levels, in contrast with the ICT services sector, where employment did not fall to such a degree in 2009 but has been experiencing a rather erratic performance ever since. It is noteworthy that sectoral employment rose significantly since the beginning of the 2000s, furthermore, it can boast one of the most dynamic rates of growth in employment compared to all sectors of the national economy. Figure 12: The ICT sector by company size(%)2011. Source: Hungarian Central Statistical Office 1. 18 According to the OECD Information and Technology Outlook (2010), two out of the 250 TOP ICT companies founded a subsidiary in Hungary, resulting in hundreds of new skilled jobs for people with IT qualifications. The ICT sector's stakeholders, inputs and significance for the national economy 1-9 empl. 64.2%Unknown and 0 empl. 24.3%10-49 empl. 7. 2 %50-249 empl. 2. 5%more than 250 empl. 1. 7%Other 11.5%ICT industry 1-9 emopl. 63.6%Unknown and 0 empl . 34%10-49 empl. 2%50-249 empl. 0. 3%more than 250 empl. 0. 1%Other 2. 3%ICT services 1 -9 emopl. 63.6%Unknown and 0 empl. 34%10-49 empl. 2%50-249 empl. 0. 3%more than 250 empl. 0. 1 %Other 2. 3%ICT services Such growth was driven largely by foreign businesses with an IT profile deciding to settle down in Hungary. 1. 8 International outlook In terms of the percentage rate of its population employed in the ICT sector, Hungary outperforms the United states, Germany and the average of OECD countries Hungary's rising employment in the ICT sector is aligned also with international trends. Of all the OECD countries, the United states employs the most people in ICT (30%of all ICT staff is employed in the US followed by Japan (16%)and Germany (9%),respectively. This does not mean, however, that each of these countries has an outstandingly high relative proportion of ICT employment, as the above results are explained largely by the sheer scale of the labour markets of the countries concerned. Based on its share of ICT employment Hungary is 3rd in the ranking of OECD countries (after Sweden and Finland), which puts it ahead of the United states, Germany or even the OECD average. 19 Figure 13: Share of ICT employment in business sector employment. Source: OECD Key ICT Indicators, 2012 8based on OECD data for 2009.0%2%4%6%8%10%Portugal Greece Spain Switzerland Austria Germany EU 15 OECD avg. Czech R. Slovakia Norway France Japan Hungary Sweden Finland 2008 1995 National Innovation Office RDI MIRROR-1. Review on the ICT Sector 2. 1 Number of research units Despite the crisis, we have seen a significant increase in the number of ICT research units between 2008-2010. There was a solid increase in the number of research units within the ICT sector in the period between 2008-2010. The rate of this increase was much faster than in other sectors: while in 2008 there were 125 research units, their number was already 207 in 2010. It is noteworthy that this growth dynamics was interrupted not even by the crisis. 2. 2 R&d expenditure, investment and cost In 2010 8. 7%of the total national R&d expenditure was spent in ICT industry and services, which is a good indicator of the sector's productivity. Despite their significant research and development potential and performance, both the ICT industry and ICT services have a relatively modest (even though growing) share of R&d investments9 and R&d costs10. In 2010 Hungary's gross domestic spending on R&d11 amounted to HUF 310.2 billion from which the share of 2. 20 Figure 14: Evolution of the number of ICT research units in the period between 2008-2010. Source: Hungarian Central Statistical Office B2b partnerships The RDI survey carried out by the National Innovation Office RDI Observatory also looked at ways in which businesses seek contact with other businesses which they regard as potential partners for cooperation. Based on this, we may conclude that ICT companies, similarly to other sectors, are predominantly looking for potential business partners for cooperation by relying on their own contact network (more than 9/10 of respondents named this method). Second in the row came the answer‘we tend to be contacted by potential partners, 'but there was also a significant proportion of companies looking for partners by visiting trade expos and fairs or by browsing specialist magazines, following announcements and websites. Figure 15: Distribution of the answers of ICT businesses participating in the survey to the question'How do you look for new cooperation partners?'.'Source: National Innovation Office RDI Observatory's survey, 2012 9 According to the Hungarian Central Statistical Office's definition, R&d investment means‘the cost of purchasing new and used fixed assets and computer software to be used in connection with and instrumental to carrying out research and experimental developments'.'10 Costs of research and experimental development: direct and indirect cost of labour carried out by staff directly employed, using equipment directly owned less amortisation (research and experimental development booked as an internal cost, or alternatively ordered or outsourced under contract). R&d performance of the ICT sector 0 20 40 60 80 100 120 140 160 180 ICT industry ICT services number of research units 2008 2009 2010 By using scou+ng methods By doing market research With media+on from professional organisa+ons (agencies and chambers) With the help of professional magazines, announcements, websites By visi+ng trade expos and fairs We tend to be contacted by others By using own social network 0%20%40%60%80%100%The share of R&d expenditure in the ICT sector is far smaller (8. 7%)than in professional, technical and scientific activities (28%),education (20.3%)or pharmaceutical manufacturing (16. 1), %but it is higher than, for example, in automotive manufacturing (4. 6%)or the manufacturing of machinery and mechanical equipment (2. 3%).It marks a positive trend from the ICT sector's perspective that the share of both ICT subsectors from R&d spending increased significantly between 2008 and 2010. For example, R&d expenditure in ICT services increased by 2. 5 times at nominal value (from HUF 5. 5 billion to HUF 13.6 billion. Within R&d expenditure in the ICT sector, the relative proportion of R&d investment is below the national average. Within gross domestic R&d expenditure, R&d investment averaged 11.4%for the national economy as a whole, compared to 7. 9%in ICT; in 21 11 R&d expenditure: sum of R&d investments and R&d costs Figure 16: Gross domestic expenditure on R&d by sector (with a separate detailed breakdown for the manufacturing industry) in 2010. Source: Hungarian Central Statistical Office the ICT sector was HUF 27.1 billion; split roughly evenly between the ICT industry (4. 4%)and ICT services (4. 3%).The ICT sector's R&d expenditure is higher than the same indicator-for example-of either automotive or machine manufacturing, but it is far smaller than the R&d expenditure of pharmaceutical manufacturing. Source of funds for R&d expenditure The RDI survey carried out by the National Innovation Office RDI Observatory also looked at the source of funds that were used by companies to cover their business expenditure on R&d in 2011. A general conclusion of the survey was that respondent companies mostly finance their related activities themselves and only a small proportion rely on either internal or external financing. According to survey data, this conclusion holds also for companies of the ICT sector. 90%of respondents replied that the necessary resources come from their own company group, and only 6. 8%and 1. 4%respectively named internal or external financing. 28%20.3%7. 8%4. 4%5. 8%16.1 4%4. 6%4 . 3%2. 3%1. 7%4. 6%33.7%Professional, scientific and technical activities Education Wholesale and retail trade, repair of motor vehicles ICT services All other sectors of the national economy Manufacture of pharmaceutical products Manufacture of motor vehicles ICT industry Manufacture of machinery and equipment n e c. Manufacture altogether: 28%20.3%7. 8%4. 4%5. 8%16.1 4%4. 6%4. 3%2. 3%1. 7%4. 6%33.7 %Professional, scientific and technical activities Education Wholesale and retail trade, repair of motor vehicles ICT services All other sectors of the national economy Manufacture of pharmaceutical products Manufacture of motor vehicles ICT industry Manufacture of machinery and equipment n e c. Manufacture altogether: National Innovation Office RDI MIRROR-1. Review on the ICT Sector other words ICT had a relatively higher share of R&d costs and a relatively lower share of investments. The manufacturing industry, which in 2010 accounted for nearly 43%of gross domestic expenditure on R&d, is heavily dominated by pharmaceutical manufacturing, with the ICT industry representing no more than 2%of all R&d investments in 2010. Capital expenditure in ICT services is dominated by professional and technical activities and education, and the 4%share of ICT services is by no means outstanding. Nevertheless, both professional and technical activities-which in terms of sectoral Figure 17: Distribution of R&d investments by sectors of the national economy (with a separate detailed breakdown for the manufacturing industry) in 2010; Source: Hungarian Central Statistical Office Figure 18: Distribution of R&d costs by sectors of the national economy (with a separate detailed breakdown for the manufacturing) in 2010; Source: Hungarian Central Statistical Office 2. 22 R&d performance of the ICT sector 27%17.1%5%4%3. 9%23.4%3. 3%4 . 7%2. 8%2%8. 7%Professional, scientific and technical activities Education Wholesale and retail trade, repair of motor vehicles ICT services All other sectors of the national economy Manufacture of pharmaceutical products Manufacture of motor vehicles ICT industry Manufacture of machinery and equipment n e c. Manufacture of electrical equipment All other manufacturing sectors Manufacture altogether: 42.9%27%17.1%5%4%3. 9%23.4%3. 3%4. 7%2. 8%2%8. 7%Professional, scientific and technical activities Education Wholesale and retail trade, repair of motor vehicles ICT services All other sectors of the national economy Manufacture of pharmaceutical products Manufacture of motor vehicles ICT industry Manufacture of machinery and equipment n e c. Manufacture of electrical equipment All other manufacturing sectors Manufacture altogether: 42.9%28.7%21.1%8. 3%4. 5%4. 2%15.5%4. 9%4. 7%2. 3%1. 5%4. 2 %Professional, scientific and technical activities Education Wholesale and retail trade, repair of motor vehicles ICT services All other sectors of the national economy Manufacture of pharmaceutical products Manufacture of motor vehicles ICT industry Manufacture of machinery and equipment n e c. Manufacture of electrical equipment All other manufacturing sectors Manufacture altogether: 33.1%28.7%21.1%8. 3%4. 5%4. 2%15.5%4. 9%4. 7%2. 3%1. 5%4. 2 %Professional, scientific and technical activities Education Wholesale and retail trade, repair of motor vehicles ICT services All other sectors of the national economy Manufacture of pharmaceutical products Manufacture of motor vehicles ICT industry Manufacture of machinery and equipment n e c. Manufacture of electrical equipment All other manufacturing sectors Manufacture altogether: 33.1%usefulness can serve a wide variety of purposes -and certain education segments can be interlinked with other sectors, and so also to a small extent with the ICT industry and services. The distribution of R&d costs within the manufacturing industry is different from the distribution of R&d investment: the dominance of pharmaceutical manufacturing is also evident in this area, but the ICT industry too has a bigger share, alongside with the automotive industry. From R&d costs incurred on services, professional and technical activities and education have the biggest share. It is important to note here too, the possible existence of particular interlinks between various sectors of the national economy, even though ICT services as such do not weight significantly in this area either (4. 5%).2. 3 Number of people employed in R&d The number of researchers and developers employed in the business sector nearly tripled in the period between 2000-2011, with the most spectacular growth taking place in the ICT services sector. The number of researchers and developers12 increased nearly threefold in the business sector during the period between 2000-2010, with the most spectacular growth occurring within ICT, particularly its services subsector: starting from 2005 we could see a slow, then from 2007 an explosive rate of growth. In the ICT services sector there were four times as many researchers and developers employed 23 Objectives of R&d activity The RDI survey carried out by the National Innovation Office RDI Observatory also examined what motivates the R&d of companies (respondents could select several possible reasons motivating their R&d activity). Figure 19: Distribution of answers by respondent ICT companies to the question‘What was the motivation behind and the objective of your R&d activity over the last 3 years (2009-2011?'.'Source: National Innovation Office RDI Observatory's survey, 2012 Relative to the companies in the entire sample, a higher percentage of ICT companies engage in R&d activity in order to develop a new product or service (this is partly what motivates 2/3 of the latter, the same ratio being 54.9%for other companies). Also, a slightly higher percentage of ICT companies identified the possibility of increasing their revenue as an important motivation for doing research and development, alongside with motivation to develop their activity and processes, albeit the latter featured as slightly less important. As far as other factors motivating R&d are concerned, ICT companies are fundamentally no different from all other respondents: sixth of them named the desire to develop their organization, and over 50%attached importance to research aimed at developing an existing product or service. It is interesting that 4%of respondent companies named doing research for the sake of research (be to be) as a motivating factor. 12 R&d employment: the number of professionals involved in developing new knowledge, products, procedures, methods and systems or their underlying concept, and in the management of R&d projects concerned. National Innovation Office RDI MIRROR-1. Review on the ICT Sector 0%10%2 0%3 0%4 0%5 0%6 0%7 0%8 0%9 0%1 00%Organisa4onal development Developing ac4vi4es, processes Poten4al revenue genera4on Further developing an exis4ng product, service , technology 0%20%40%60%80%100%in 2009 than in 2005. The number of research and development personnel employed in the ICT industry continued to increase until 2007 then after a drop in 2008 the sector could once again start making a contribution to the increase in R&d employment. The most dynamic increase in R&d employment took place in the ICT services sector compared to other branches of the national economy, so by 2008 the ICT services sector was ahead even of the pharmaceutical industry in terms of the number of people employed in research, even though the latter is characterised by a wealth of R&d traditions and capacity, as well as nearly 400%higher R&d spending. ICT services employ more researchers and developers than either the pharmaceutical or the automotive industry. 2. 4 Regional distribution of ICT research and development personnel By far the highest number of researchers is employed in Central Hungary, even though regional gaps are narrowing. 2. Figure 20: Rate of R&d employment increase in the ICT sector and other business sectors in 2005-2009. Source: Eurostat 13 FTE: Full-time Equivalent 14 More than half of research and development personnel is employed in education as a branch of the national economy. The education sector has been omitted from this Figure to allow for the visibility of relevant indicators of smaller sectors. At the same time, it should be noted that the activity of research and development personnel employed in education involves a wide range of disciplines, and it is interrelated with several economic sectors. Figure 21: Number of people employed in research and development (FTE) in the national economy as a whole, in a breakdown according to sectors, excluding education. Source: Hungarian Central Statistical Office 24 R&d performance of the ICT sector 0 2, 000 4, 000 6, 000 8, 000 10,000 12,000 2005 2006 2007 2008 2009 capita R&d personnel in the ICT services sector R&d personnel in the ICT industry R&d personnel in all other sectors 0 1000 2000 3000 4000 5000 6000 7000 Other sectors in total: ICT Industry Manufacture of basic pharmaceutical products and pharmaceutical preparations Wholesale and retail trade; repair of motor vehicles and motorcycles ICT services Human health services Manufacturing industry (excl. pharma and ICT industry) Professional, scientific activities 2008 Rate of growth for 2010 25 Figure 22: Distribution of R&d personnel in the ICT service sector(%)across various regions of Hungary. Source: Hungarian Central Statistical Office 7. 7 2. 7 2. 3 1. 1 0. 2 3. 3 2008(%)Central Hungary South Great Plain Central Transdanubia South Transdanubia Northern Hungary West Transdanubia Northern Great Plain Other regions: 17.2 Central Hungary: 82.8 The dominance of Central Hungary within the ICT services sector has become less pronounced from 2008 to 2010 in terms of the number of people employed in research and development, but this region is still playing a central role as nearly 70%of ICT researchers and developers still work here. Although currently the number of R&d professionals employed in other regions is still significantly lower compared to the central region, and Central Hungary is likely to continue to maintain its leading role also in the foreseeable future, a slow increase has been taking place in all regions between 2008 and 2010 with the exception of the Northern Great Plain region. The most spectacular growth was seen in Northern Hungary: while in 2008 this region employed just above 1%of all R&d personnel working in Hungary, in the space of two years this rate increased to above 11%.%The growth in Hungarian ICT R&d employment is outstanding even in international terms. 9. 2 2. 7 4 11.4 0. 9 2. 7 2010 (%)Central Hungary South Great Plain Central Transdanubia South Transdanubia Northern Hungary West Transdanubia Northern Great Plain Other regions: 30.9 Central Hungary: 69.1 Figure 23: Relative proportion of ICT research and development professionals within the total R&d employment(%.%Source: Eurostat 0%5%10%15%20%25%30%Czech republic Poland Hungary Bulgaria Austria Germany 2007 2009 National Innovation Office RDI MIRROR-1. Review on the ICT Sector From 2007 to 2009, the number of ICT research and development professionals employed in the ICT sector nearly doubled in Hungary, thereby demonstrating outstanding growth even in international comparison. Of all Visegrad countries, the Czech republic employs the most FTE researchers and developers, Hungary being roughly at the same level as Poland; and Slovakia significantly lagging behind other Visegrad countries. As per 1, 000 capita of the population, the Czech republic employs the highest number of researchers and developers, Poland and Slovakia are significantly lagging behind Hungary (both countries employing 2/3 fewer researchers and developers per capita of the population). While R&d employment within the ICT service sector is on the same scale for Poland, the Czech republic and Hungary in absolute terms, in terms of the percapita indicator Hungary and the Czech republic are clearly in the lead for employing the highest number of R&d personnel within the ICT service sector. 2. 5 Patents international comparison The relative proportion of ICT patents within all patents increased significantly in Hungary over the past decade, in contrast with EU Member States, which recorded declining trends on the whole. The R&d performance of a sector is measurable partly by the number of registered patents. The number of patents within the ICT sector does not necessarily reflect the sector's R&d performance; as products of the sector have such a short life cycle they often do not ever reach patent stage, as illustrated by so many significant ICT achievements of the recent past. This notwithstanding, the ratio of ICT patents within all patents has risen. As an international comparison conducted by the OECD demonstrates, Hungary outperformed the average of the EU27 in terms of relative weight Figure 24: The number of research and development professionals employed (FTE) per 1, 000 capita of the population (columns) and within that the ratio of R&d personnel in the ICT services sector (marked in red in the pie chart) in the context of Visegrad countries, 2009; Source: Eurostat 2. 26 R&d performance of the ICT sector 0 0. 2 0. 4 0. 6 0. 8 1 1. 2 1 . 4 Czech republic Hungary Slovakia Poland Number of research scientists per 1, 000 capita of the population 12%88%16%84%1%99%17%83 %of ICT patents in the period between 2007-2009. The 27.8%ratio for this period represented an improvement compared to 23.6%in 2001-2003.2.6 Innovative ICT businesses Nowadays innovation has become a major competitive factor for nearly all companies, and this is particularly true for dynamically developing industries, such as the ICT sector. Before we move on to an overview of the innovation performance of ICT businesses, it is important to provide a definition of innovation. According to the internationally accepted definition, innovation means‘the introduction of a new, or significantly further developed product, goods, service or process, new marketing method, or new organizing-organizational method in the context of an enterprise's business practice, work organisation or external relations15. Accordingly, we can make two further important observations regarding the concept of innovation: the product/procedure does not necessarily have to be novel for the market as a whole, it is enough for it to be novel within a specific organisation; it is not mandatory for an organisation to develop its own products, procedures and methods, alternatively it can outsource this activity to other businesses. Figure 25: ICT-related patents as a percentage of national total in 2001-2003 and 2007-2009. Source: OECD, 2012 27 Patents and trademarks 13.6%of ICT companies participating in the National Innovation Office RDI Observatory's corporate RDI survey had registered a patent in Hungary, while 7. 9%also had registered a patent in a foreign country. This ratio is slightly more modest when it comes to trademarks: 10.4%of respondent ICT companies had registered a trademark in Hungary, and only 3. 6%had registered a trademark in a foreign country. 15 Oslo Manual guidelines for collecting and interpreting innovation data, 3rd edition, 2005, pp 146.0%10%20%30%40%50%60%Czech R. Spain Germany Poland Austria Norway EU27 avg. Hungary France Sweden Finland 2001-2003 2007-2009 National Innovation Office RDI MIRROR-1. Review on the ICT Sector is significantly behind the 51%ratio measured for the EU27. The ICT services sector is the most innovative of all service sectors From all the sectors covered by the survey the pharmaceutical industry came on top, with 75%of companies classed as innovative. The ICT industry is fifth in the ranking of manufacturing industry sectors, whereas ICT services are the most innovative of all services sectors It is a key issue for companies, to what degree they can renew themselves and to what extent they can follow changing market needs, to adapt and develop their products and services accordingly, and to what extent they are prepared to renew themselves and how they can improve the efficiency of their operations. According to the findings of the Community Innovation Survey (CIS in 2006-2008 28.9%of Hungarian businesses fulfilled the criteria of an innovative business, then for 2008-2010 this ratio improved marginally to 31.1, %but even so Hungary 2. 28 Figure 26: Share of innovative businesses with at least 10 employees in various sectors of the national economy and in the manufacturing industry, 2008-2010. Source: CIS 2010, Hungarian Central Statistical Office R&d performance of the ICT sector 0%10%20%30%40%50%60%70%80%90 %100%Manufacture of leather and related products Manufacture of basic metals; manufacture of fabricated metal products Manufacture of wood and paper products, and printing Other manufacturing, and repair and installation of machinery and equipment Manufacture of machinery and equipment n e c. Manufacture of rubber and plastic products Manufacture of food products, beverages and tobacco products ICT industry Manufacture of electrical equipment Manufacture of public transport equipment Manufacture of chemicals and chemical products Manufacture of basic pharmaceutical products and pharmaceutical preparations Manufacturing 0%10%20%30%40%50%60%70%80%90%100%Transportation and storage Wholesale and retail trade; repair of motor vehicles and motorcycles Wholesale trade (excl. vehicles, motorcycles) Water supply Financial and insurance activities Electricity, gas, steam and air conditioning supply ICT services Services Share of innovative enterprises in total (product, process, organisational, marketing) Share of non-innovative enterprises 29 covered by the survey. The majority of the ICT sector's innovative companies with at least 10 employees (like the majority of other sectors) are engaged in product or procedural innovation and organisational or marketing innovation at the same time, with a smaller proportion of companies engaged only in product or procedural innovation or only in organisational and marketing innovation. It is noteworthy that within the ICT sector organisational or marketing innovation is the second most important innovation orientation. By comparing the innovation performance of the two subsectors comprised by the ICT sector in the period between 2008-2010 and the previous period (2006-2008), we find that the rate of innovative companies within the ICT industry actually fell -even if at a relatively modest rate (down from 42%to 38.4%)-when the rate of innovative ICT service provision companies went up (from 47.6%to 48.4%).%)Decrease in the manufacturing industry was caused primarily by a fall in the number of companies engaged only in product and/or procedural innovation (down from 15.2%to 10.8%whereas increase in the relative proportion of innovative companies within the services sector is explained by a growing number of companies engaged only in organisational and/or marketing innovation (up from 8. 1%to 14.7%).%)We are seeing a declining trend in the number of innovative companies in the ICT industry, mainly because the number of companies implementing technological innovation only is dropping Figure 27: Share of innovative companies with at least 10 employees by type of innovation in 2008-2010. Source: CIS 2010, Hungarian Central Statistical Office National Innovation Office RDI MIRROR-1. Review on the ICT Sector 0%10%20%30%40 %Manufacture of textiles, wearing apparel, leather and related products, including footware Manufacture of basic metals and fabricated metal products Manufacture of paper and paper products, printing Manufacture of rubber and plastic products Manufacture of machinery and equipment n e c. Manufacture of food products, beverages and tobacco products Other manufacturing, repair and installation of industrial machinery, equipment and instruments Manufacture of electrical equipment ICT industry Manufacture of chemicals and chemical products Manufacture of public transport vehicles Manufacturing of basic pharmaceutical products and pharmaceutical preparations Manufacturing 0%5%10%15%20%25%Transportation and storage Wholesale and retail trade; repair of motor vehicles and motorcycles Wholesale trade (except: vehicles, motorcycles) Water supply Financial and insurance activities Electricity, gas, steam and air conditioning supply ICT services Services Share of innovative enterprises engaged in product or process innovation and organisational or marketing innovation Share of enterprises engaged only in organisational or marketing innovation Share of enterprises engaged only in product or process innovation 2. 7 Tender system: grant agreements and awarded amounts The credit crunch brought about by the financial crisis and further deepened by high funding costs accentuated the importance of all forms of grant funding, offering companies a way of financing their developments at below-market rates. The following is a brief overview of how the ICT sector is using available domestic innovation funding as well as EU funding. Innovation grants are a significant boost to the competitiveness of the ICT sector, and given the relatively high value added of this sector (as analysed above), this has a positive knock-on effect on the national economy as a whole; therefore, unsurprisingly, supporting such grants is seen as a priority also in the New Széchenyi Plan. Information technology sciences account for 24.4%of total awarded domestic tender funding and nearly 18%of the number of successful tender applications. When analysing the ICT sector, it is important to take into account the share of individual sectors from total available domestic innovation funding. Figure 23 shows the respective share of information technology sciences from the Research and Technology Innovation Fund in terms of awarded tender amounts and the number of successful tender applications in 2007-2012.16 (For the sake of comparison we also included pharmaceutical sciences. Information science accounts for 24.4%of total awarded tender funding, and 18%of the total number of successful tender applications. These being exceptionally high percentage rates mean that information technology science could prove an engine of Hungarian innovation also in the long term provided of course that tender funds are used to generate adequate returns. The share of information science from total funding is much higher than funding awarded for pharmaceutical sciences. Figure 28 clearly illustrates that the share of information science disciplines from total funding in Hungary is much higher than funding awarded to highly innovative 2. 30 Tender participation From the 280 ICT sector companies taking part in the National Innovation Office RDI Observatory's RDI survey nearly 60%responded to a call for tender bids at some point over the last five years in Hungary (the highest level of activity demonstrated by small and medium size enterprises, with participation rates exceeding 65%and 71%respectively). 16 It should be noted that while our report focuses on the ICT sector as such, the heading of the table reads‘information technology sciences'.'The reason for this is that of all scientific disciplines designated by tender applicants in their tender applications, information technology is the discipline which is closest to the ICT sector and so it is positioned best to provide adequate information for evaluating the tender performance of the ICT sector. At the same time, our results could be distorted by tender applicants failing to designate all applicable scientific disciplines: in 2007-2012, applicants achieved a 66%rate of completion. This Figure shows tender applications in a breakdown by scientific discipline. Figure 28: Share of information science and pharmaceutical science disciplines from the Research and Technology Innovation Fund in the period between 2007-H1 of 2012 (taking into account the date of the decision awarding the tender funding, in all tender applications classified according to scientific disciplines); Source: Research and Technology Innovation Fund tender management system (PKR) R&d performance of the ICT sector 0%5%10%15%20%25%30%Allocation of awarded tender grant amount Distribution of the number of successful tender application Information science Pharmaceutical science and traditionally competitive pharmaceutical science disciplines, which are linked closely to the pharma industry. It is evident at the same time that even though the share of information science was higher in both comparisons presented above, its precedence over pharmaceutical science is pronounced far less in terms of the amount of awarded funding than in terms of the number of tender applications. Companies with an IT profile have implemented probably a higher number of smaller projects in contrast to the pharmaceutical industry, where a successful innovative development tends to be a lot more capital intensive. This being the case confirms the observation made earlier regarding R&d expenditure, namely that the ICT sector is less R&d intensive. It serves to demonstrate the potential inherent in IT also from a tender aspect, as compared to highly capital intensive industries (like pharmaceutical manufacturing and the machine industry) in IT relatively low investment can generate very high returns. EU grants have paramount importance among available forms of funding, as they allow companies to obtain large amounts of financing for various developments by contributing only a limited amount of their own capital. How efficiently and how fully it is able to draw down such funding is of vital importance for Hungary. According to Figures 30 and 31, Hungary has a major backlog in EU comparison (both in terms of the number of grant agreements, and in terms of awarded grant amounts). However, by comparing Hungary's performance with new accession EU member states it becomes evident that Hungary actually ranks rather high on both indicators, its performance being roughly similar to that of the Czech republic, a country of similar size. All in all, within the FP7 Framework Programme among EU12 member states, Hungary has the highest number of signed ICT grant agreements after Poland, and it has 3rd place in terms of awarded grant amounts. 31 What can the government do to boost the R&d performance of ICT companies? In their answers to the National Innovation Office RDI Observatory's survey, 3/4 of ICT companies similarly to respondents from other sectors mentioned tax allowances as the single biggest help which the government can extend to boost their R&d performance. The second most common answer was putting greater emphasis on direct forms of support (69.6), %followed by (nearly 2/3 of companies) announcing more RDI tenders and greater predictability of the regulatory environment (61.1), %with more than half of respondents also stressing the importance of having access to regional tender funds and to guarantee funds. Figure 29: Answers to the question‘How can government action boost the R&d performance of ICT companies?'.'Source: National Innovation Office RDI Observatory's survey, 20120%20%40%60%80%100%By promoting technology transfer By strengthening the protection of intellectual property rights By relying on venture capital and JEREMIE funds By providing education and training By providing access to regional tender funds and guarantee funds By creating a more predictable regulatory environment By offering a wider range of R&d tenders By putting more emphasis on direct forms of support Through tax allowances ICT other sectors National Innovation Office RDI MIRROR-1. Review on the ICT Sector Through tax allowances By putting more emphasis on direct forms of support By offering a wider range of R&d tenders By creating a more predictable regulatory environment By providing access to regional tender funds and guarantee funds By providing education and training By relying on venture capital and JEREMIE funds By strengthening the protection of intellectual property rights By promoting technology transfer By comparing EU-27 countries individually, we may conclude that Hungary has 16th place in terms of the relative proportion of successful tender applications, 17th place in terms of awarded tender grants, and 20th place as a proportion of the size of its population in the ranking of these member states. Even though the rest of new accession countries too have a backlog in terms of how much EU funding they have been able to actually draw down Hungary still has a long way to go to catch up with the average of the EU-27.12.9%of ICT projects presented under the FP7 Framework Programme were approved for funding, and tender applicants were able to secure an even smaller percentage-only 11.6%-of total requested funding. 2. 32 R&d performance of the ICT sector 30.4 16.1 28 28.7 0 20 40 PL CZ HU SI RO CY BG SK EE LV LT MT EU 27 avg EU 12 avg V4 avg 122 461 67 115 0 50 100 150 200 250 300 350 400 450 500 PL HU CZ SI RO BG CY SK EE LT LV MT EU 27 avg EU 12 avg V4 avg number of signed agreements Figure 31: EU funding awarded to ICT sector companies (EUR million; under the FP7 Framework Programme, 2007-2012) E-CORDA 30.4 181 16.1 28 28.7 0 20 40 60 80 100 120 140 160 180 200 PL CZ HU SI RO CY BG SK EE LV LT MT EU 27 avg EU 12 avg V4 avg millio € 122 461 67 115 0 50 100 150 200 250 300 350 400 450 500 PL HU CZ SI RO BG CY SK EE LT LV MT EU 27 avg EU 12 avg V4 avg number of signed agreements Figure 30: The number of sealed and signed ICT grant agreements (under the Seventh Framework Programme for Research and Technological Development for 2007-2012; Source: E-CORDA Summary In most OECD member countries reviewed, ICT investments make a greater contribution to economic growth than the investments of all other sectors combined. The EU attributes a vital role to ICT tools and services, as it is with their help that we can create a digital internal market that could bring numerous potential growth opportunities for the region. The European union has several competitive disadvantages compared to its main rivals (e g. Japan or the US), whether we look at the ICT sector's R&d intensity, its value added, or share of patents. Hungary is clearly not an infocommunication powerhouse within Europe yet it demonstrated impressive growth in that area in recent years, supported by indicators that give cause for optimism regarding the sector's future. A good example of the above is that a significant part of the rapid productivity improvement in the Hungarian domestic economy (nearly sixth of it) is attributable to ICT products and services. At the same time, sectoral value added increased considerably within total value added for the corporate sector-exceeding the OECD average, which illustrates clearly the potential which is inherent in this sector. It is also notable, that the Hungarian ICT sector has achieved outstanding growth in international comparison despite its expenditure levels are below the average of OECD countries. The macroeconomic significance of the ICT sector is demonstrated also by the fact that more than 25%of Hungarian manufacturing industry exports are generated by products of the ICT industry, with ICT services playing also a significant role in the trade of services. The ICT industry and ICT services-both distinguished by a balance of trade surplus-have both been making a significant contribution to maintaining the country's external balance. While in recent years there has been a rising number of ICT companies in Hungary, nevertheless the Hungarian national economy has an economy of scale which determines the scale of the Hungarian ICT sector too: i e. the majority of companies operating in the sectors covered by our analysis are micro-businesses. The big picture becomes slightly more subtle if we consider that small and medium-sized businesses represent a relatively higher percentage of all businesses engaged in the ICT industry than in the national average. If we examine the sector from the aspect of research centres, we find that the ICT industry and ICT services both present significant R&d potential also with regard to research units with a strong increase in the number of ICT research units between 2008-2010, a trend that was interrupted not even by the economic downturn. The size of the research and development personnel nearly trebled in the business sector in the period between 2000-2011, with the most spectacular growth taking place in the ICT services sector. During the same period, if we look at not just strictly the number of research and development professionals, there was significant growth also in the scale of overall ICT employment. 33 National Innovation Office RDI MIRROR-1. Review on the ICT Sector Summary 34 Speaking of expenditure, it needs to be underlined that R&d expenditure in the ICT sector is well below the expenditure of other sectors. From the gross domestic R&d expenditure of the economy R&d spending is compared proportionately modest to other sectors, but it has an increasing trend. The ICT sector is the 5th most innovative sector in the ranking of manufacturing industry sectors, while ICT services are at the top of the innovation league table within all service sectors in the Hungarian economy. It is a warning sign, however, that currently we are witnessing a decreasing trend in the relative proportion of innovative companies within the ICT industry. Innovation grants contribute to improve the competitiveness of the ICT sector. Information science disciplines account for a high percentage of awarded tender funding with their share from grants well exceeding those in pharmaceutical science disciplines that are extremely innovative and traditionally competitive in Hungary and are linked closely to the pharmaceutical industry. In view of this analysis of the ICT sector's status on R&d, it is clear that the sector can rightfully be regarded as a potential breakout point for the Hungarian economy. Facilitating RDI performance of the ICT sector would without doubt improve the sector's already remarkable results, which is in the interests not only of sectoral players but also of the national economy as a whole, given that ICT activities are interlinked practically with all sectors of the economy. Bibliography Csonka László: Research and development and innovation in the light of globalisation-a case study of small and medium size enterprises in the Hungarian IT sector (Kutatás-fejlesztés és innováció a nemzetköziesedés tükrében a magyar információtechnológiai ágazat kis-és középvállalatainak esete. Külgazdaság, 2011.9-10. European commission: EU Innovation Union Competitiveness Report 2011 http://ec. europa. eu/research/innovation-union/index en. cfm? section=competitiveness-report&year=2011 European commission: Annual Growth Survey, 2012 http://ec. europa. eu/europe2020/pdf/annual growth survey en. pdf Ernst&young: The Power of Simplicity Toward a smarter and streamlined innovation policy in the EUHTTP://www. ey. com/Publication/vwluassets/Growing beyond: Government and Innovation 2012/$file/Growing%20beyond%20summit report final spread. pdf Eurostat Statistical Database http://epp. eurostat. ec. europa. eu/portal/page/portal/statistics /search database HCSO First Release, serial no.:124 (KSH Gyorstájékozató, 142. szám), 2012. http://www. ksh. hu/docs/hun/xftp/gyor/gde/gde21206. pdf HCSO Statistical Reflection: Innovation, Volume VI. Issue 59 (KSH Statisztikai Tükör: Innováció, VI. évf. 59. szám), 2012. http://www. ksh. hu/docs/hun/xftp/idoszaki/innovacio/innovacio10. pdf HCSO Dissemination Database (KSH Tájékoztatási adatbázis) http://statinfo. ksh. hu/Statinfo/themeselector. jsp? &lang=hu Research and Technology Innovation Fund-tender management system (Kutatási és Technológiai Innovációs Alap pályázatkezelo rendszere, PKR) OECD: Frascati Manual Proposed Standard Practice for Surveys of Research and Experimental Development, 2002 http://www. nih. gov. hu/innovaciopolitika/publikaciok-tanulmanyok/frascati-kezikonyv -080523 OECD Information and Technology Outlook (2010) http://www. oecd. org/internet/interneteconomy/oecdinformationtechnologyoutlook2010. htm OECD: Key ICT Indicators http://www. oecd. org/internet/broadbandandtelecom/oecdkeyictindicators. htm Oslo Manual guidelines for collecting and interpreting innovation data, 3rd edition, 2005, pp 146. World bank Database http://data. worldbank. org/35 National Innovation Office RDI MIRROR-1. Review on the ICT Sector All figures together with underlying tables are accessible through the National Innovation Office Kaleidoszkóp internet portal www. kaleidoszkop. nih. gov. hu. Figure 1: The EU's ICT sector in international comparison (2007. Source: European commission: EU Innovation Union Competitiveness Report 2011.10 Figure 2: Annual average labour productivity growth and ICT contribution to such growth in total industries, 1995-2008(%.%Source: OECD Key ICT Indicators, 2012.11 Figure 3: Share of ICT value added in the business sector value added, Source: OECD Key ICT Indicators, 2012. There is no data available for Poland 1995)..12 Figure 4: Gross value added of the Hungarian ICT sector as a percentage of value added of the total economy, 1995-2011. Source: Hungarian Central Statistics Office...13 Figure 5: Balance of trade in the ICT industry and its share from Hungarian manufacturing industry exports and imports in 2008-2011(%.%Source: Hungarian Central Statistics Office...14 Figure 6: Balance of trade in ICT services (HUF bln) and their relative proportion within the import and export of services(%)in 2008-2011. Source: Hungarian Central Statistical Office...15 Figure 7: Number of business enterprises in the ICT sector, 2003-2010. Source: Hungarian Central Statistical Office...15 Figure 8: Breakdown of respondent companies'answers to the question‘Which organisations are you in (regular, close) liaison with?'.'Source National Innovation Office RDI Observatory's survey, 2012.16 Figure 9: Breakdown of active business enterprises by sector and branches of the national economy, 2010. Source: Hungarian Central Statistical Office...17 Figure 10: Distribution of ICT companies according to corporate life cycle. Source: National Innovation Office RDI Observatory's survey, 2012.17 Figure 11: Distribution of ICT companies based on their current development phase in terms of R&d. Source: National Innovation Office RDI Observatory's survey, 2012.17 Figure 12: The ICT sector by company size(%)2011. Source: Hungarian Central Statistical Office...18 Figure 13: Share of ICT employment in business sector employment. Source: OECD Key ICT Indicators, 2012.19 Figure 14: Evolution of the number of ICT research units in the period between 2008-2010. Source: Hungarian Central Statistical Office...20 Figure 15: Distribution of the answers of ICT businesses participating in the survey to the question'How do you look for new cooperation partners?'.'Source: National Innovation Office RDI Observatory's survey, 2012.20 Figure 16: Gross domestic expenditure on R&d by sector (with a separate detailed breakdown for the manufacturing industry) in 2010. Source: Hungarian Central Statistical Office...21 List of Figures 36 List of Figures 37 Figure 17: Distribution of R&d investments by sectors of the national economy (with a separate detailed breakdown for the manufacturing industry) in 2010; Source: Hungarian Central Statistical Office...22 Figure 18: Distribution of R&d costs by sectors of the national economy (with a separate detailed breakdown for the manufacturing) in 2010; Source: Hungarian Central Statistical Office...22 Figure 19: Distribution of answers by respondent ICT companies to the question‘What was the motivation behind and the objective of your R&d activity over the last 3 years (2009-2011?'.'Source: National Innovation Office RDI Observatory's survey, 2012.23 Figure 20: Rate of R&d employment increase in the ICT sector and other business sectors in 2005-2009. Source: Eurostat...24 Figure 21: Number of people employed in research and development (FTE) across the national economy as a whole, in a breakdown according to sectors, excluding education. Source: Hungarian Central Statistical Office...24 Figure 22: Distribution of R&d personnel in the ICT service sector(%)across various regions of Hungary. Source: Hungarian Central Statistical Office...25 Figure 23: Relative proportion of ICT research and development professionals within total R&d employment(%.%Source: Eurostat...25 Figure 24: The number of research and development professionals employed (FTE) per 1, 000 capita of the population (columns) and within that the ratio of R&d personnel in the ICT services sector (marked in red in the pie chart) in the context of Visegrad countries, 2009; Source: Eurostat...26 Figure 25: ICT-related patents as a percentage of national total in 2001-2003 and 2007-2009. Source: OECD, 2012.27 Figure 26: Share of innovative businesses with at least 10 employees in various sectors of the national economy vs manufacturing industry sectors, 2008-2010. Source: CIS 2010, Hungarian Central Statistical Office...28 Figure 27: Share of innovative companies with at least 10 employees by type of innovation in 2008-2010. Source: CIS 2010, Hungarian Central Statistical Office...29 Figure 28: Share of information science and pharmaceutical science disciplines from the Research and Technology Innovation Fund in the period between 2007-H1 of 2012 (taking into account the date of the decision awarding the tender funding, in all tender applications classified according to scientific disciplines); Source: Research and Technology Innovation Fund tender management system (PKR...30 Figure 29: Answers to the question‘How can government action boost the R&d performance of ICT companies?'.'Source: National Innovation Office RDI Observatory's survey, 2012.31 Figure 30: The number of sealed and signed ICT grant agreements (under the Seventh Framework Programme for Research and Technological Development for 2007-2012; Source: E-CORDA...32 Figure 31: EU funding awarded to ICT sector companies (EUR million; under the FP7 Framework Programme, 2007-2012) E-CORDA...32 National Innovation Office RDI MIRROR-1. Review on the ICT Sector 38 National Innovation Office Government Decree 303/2010 (XII. 23. established the National Innovation Office (NIH) as the governmental body responsible for research, development and technological innovation. The Office operates under the direction of the Minister for National Economy. Main activities of the National Innovation Office: u RDI strategic analysis and planning u operate the Kaleidoszkóp system u be involved in the development and application of RDI policy u coordinate and facilitate international RDI cooperation International activity: u attract foreign investment to Hungary u harmonise international and EU RDI policies u coordinate bilateral scientific and technological cooperation SME-support activities: u provide easier access to domestic RDI results for market players u support research-related cooperation and promote networking between RDI players u provide innovation management services u boost the innovation activity of SMES To promote these objectives, NIH works in close cooperation with other government agencies, ministries, bureaus, the Hungarian Academy of Sciences, higher education institutions and research institutes, national and regional organisations and market players with an RDI involvement. Kaleidoszkóp Kaleidoszkóp (the name refers to the multifaceted nature of RDI) is the name of the information system used by the National Innovation Office. Kaleidoszkóp's objective is to create an integrated RDI database of the relevant institutions and companies of the sector as well as data and analyses supporting RDI policy related decision-making. With the help of this database, RDI stakeholders can be involved in diagnosing problems as may exist within the sector and work out possible solutions. All Kaleidoszkóp system data and service functionalities are meant to assist public sector institutions and other organisations in their networking, strategy development and market analysis efforts. Kaleidoszkóp is operated by the National Innovation Office RDI Observatory Department. Kaleidoszkóp's homepage: www. kaleidoszkop. nih. gov. hu Kaleidoszkóp's main objectives: u promote networking within the RDI sector u assist facts-based decision-making u assist national and international statistical activity u provide solid foundations for RDI strategy-making Kaleidoszkóp 's services: u generic and specific sectoral RDI analyses and statistics u quality data sources informing analysis u information on public funded RDI projects u register of Hungarian research infrastructure facilities u map-based search engine of RDI organisations and businesses u finding project partners and mapping project opportunities Bemutatkozó Phone:++36 1 484 2500 Fax:++36 1 318 7998 E-mail: info@nih. gov. hu Web: http://www. nih. gov. hu http://kaleidoszkop. nih. gov. hu/ISSN 2063-7748 ISBN 978-963-08-5934-9 NATIONAL INNOVATION OFFICE INFORMATION SYSTEM

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