R&D capacity remains a barrier to economic growth in CEE

At the end of last year, we wrote an article on the 2022 Global Innovation Index (GII), pointing out that, on average, Central & Eastern European countries had fallen almost two places down the innovation rankings over the previous two years.

As you would expect, the GII focuses hard on R&D capacity and Eurostat, the EU’s statistical office, published an article last week entitled “EU governments increased R&D allocations by 5% in 2022”. That sounded very positive – and it feels fair enough to spin it that way given the context of the pandemic and all of the myriad pressures on public spending. However, the situation looks a bit different if, rather than considering government funding for R&D in Euro terms, you look at it as a percentage of GDP. In that case, spending was actually down slightly, from 0.77% in 2021 to 0.74% in 2022. That might not seem like a lot, but it was the first annual fall in government R&D spending since 2015.

When you look at this issue from a specifically Central & Eastern European perspective, it’s even harder to spin a positive story, because the latest numbers reveal three interconnected problems which combine to have serious implications for the economic growth potential of this region:

1. Governments in CEE spend less on R&D than in most Western European member states

It’s easier to compare countries by considering the percentage of GDP that is spent by governments on R&D rather than the total Euro amounts. In every CEE member state, that percentage is lower than the EU average:

Furthermore, in each of the four largest CEE economies (the Czech Republic, Hungary, Poland and Romania), the drop-off in R&D spending between 2021 and 2022 was significantly larger than the EU average.

2. This is compounded by the fact that, in CEE, the private sector typically contributes less to overall spending on R&D than is the case in Western Europe

When you break down the spending on R&D by the three main sectors that contribute to it – the business enterprise sector, the government sector and the higher education sector – you find that, in most CEE countries, the business sector contributes less of a share than the EU average of 65.9%. Of the largest CEE economies, only Hungary bucks that trend: 

The private sector contributes even less than Slovakia in some of the smallest CEE countries, for example Lithuania (48.6%), Croatia (46.8%) and Latvia (33.3%).

3. This, in turn, puts pressure on the higher education sector to contribute more – but universities are poorly funded across CEE

We wrote recently about the fact that the education sector is under-funded across CEE. This affects universities as well, with every single CEE member state below the EU average when it comes to the percentage of GDP that is spent on tertiary education:

Money is not the only problem, either. One of the metrics tracked by the GII was the collaboration between universities and industry around R&D. The GII gave each country a score in this area, based on which it ranked them against every other country globally. This is how the EU’s member states were ranked:

So although some CEE countries are performing reasonably well (particularly the Czech Republic), and some of the biggest Western European countries have a poor track record in this area (particularly France and Spain), most of the CEE member states still have plenty of work to do to strengthen the links between universities and industry on R&D.

In general, increasing R&D capacity remains a stubborn challenge in CEE, but if governments across this region are to meet their objective of transitioning to more innovation-based economies, it is one that they will need to address head-on.