Will we Ever Overcome the Innovation Deficit in CEE?

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Peter Stracar

About Peter Stracar

Peter Stracar, CEO, Central and Eastern Europe at GE, which employs approximately 26,000, has 18 factories, five technology centres and three banks and represents a $4 billion market for the company. Prior to joining GE, he spent 18 years at Hilti Corporation, based in Hong Kong, completing his time with the firm as President of Asia Pacific. He started his career at IBM Eastern Europe. Mr Stracar has a Master’s degree in Electronic Engineering and Computer Science from the Technical University of Kosice, Slovakia.

The statement “if California were a country, by GDP it would be the sixth largest economy of the world ahead of France” has really proved my long-held belief that reading WEF reports is certainly not an ideal leisure activity.

If one adds to this that the Golden State produced its $2.44 trillion of economic output with six million fewer workers than France, any CEE-hearted global citizen would be close to having a heart attack after realising that the EU countries have a huge innovation deficit, with the CEE somewhere at the back of the line.

CEE, with the V4 countries at its heart, has experienced unprecedented growth in the past 20 years. The source of that growth, however, has been low labour costs, robust internal consumption and foreign direct investments. However, a preoccupation with pure technology is not going to maintain economic growth in the long run and the increase in productivity is getting closer to the boundaries of technology. If the V4 countries continue to follow others, instead of creating their own ideas, growth will be soon replaced by stagnation. Further growth needs different drivers, otherwise the CEE is going to be stuck in the middle income trap.

CEE lagging behind

When it comes to listing the reasons, money always comes first. The V4 countries spend only one per cent of their GDP on R&D, while the OECD average is 2.4 per cent. This clearly shows that the support provided by CEE governments is really insufficient. Only the Czech Republic’s two per cent spend on R&D is close to the EU average of 2.03 per cent, while Hungary (1.38 per cent), Slovakia (0.89 per cent) and Poland (0.94 per cent) are half as innovative as other EU countries.

I strongly believe, however, that the issue is not just about money. It is also about having a supportive public and political framework, which helps develop an innovation culture. This is a second area which could be improved in the V4. The Global Innovation Index ranked the V4 between 27th and 35th globally, when it came to how the regulatory environment supports innovation. Global excellence requires a stronger role for the private sector in order to raise efficiency, which means that increasing R&D spending also needs more products, which could be commercialised on a global level.

These issues have a snowball effect. One of the consequences of the less public and political framework is the weak Intellectual Property (IP) culture in the V4, which is clearly reflected in its patent application statistics. In 2016, for example, there were 408 European patent applications from Poland, 28 per cent fewer than in the previous year, and a very low number given the size of the country. The number in the Czech Republic was also down, by 13 per cent, to 185, and in Slovakia there were fewer than 100 applications.
Only Hungary showed a slight increase, but with 108 applications it is still at a very low level. GE squeezed into the top ten companies, with the most European applications in 2016, i.e. 1,628 applications. This means that GE submitted more patent applications than the entire V4 combined, last year.

The weak IP culture is also embodied in what we call the “not functioning innovation linkages”. Specifically, this means the level of research collaboration between universities and industry, the state of cluster development and the volume of joint ventures/strategic deals. In this respect, the CEE really underperforms relative to its real opportunities, and given the fact that it has a good higher education system and leading multinational companies are present in the countries.

Consequently, there is sometimes a conservative approach to innovation in CEE. Executives in the region are mindful of the threat of ‘Digital Darwinism’, with more and more companies becoming obsolete as technology evolves quicker than they can adapt. However, despite this awareness, CEE companies favour more conservative innovation strategies, preferring to rely on incremental innovation rather than breakthrough technologies.

Likely to overcome?

Let the private sector drive the car. €14 billion from EU structural funds will be spent on R&D in the V4 countries in the period leading up to 2020. If I had one request for governments across the region, and only one, it would be to invest this money in creating an efficient cooperation with the private sector. The truth is that there are only a handful of examples of products that have been developed in CEE, and which have gone on to be globally successful. This area — turning great ideas into products which can be commercialised on a global level — is one that the private sector understands better than anyone else.

This request is strongly linked to my digital belief: the WEF describes some CEE countries as economies that are transitioning from efficiency-driven (manufacturing-focused) to innovation-driven. I truly believe that for those transition countries, it’s the digitalisation of the industry that offers the enormous potential to catch up with Western Europe and the US.

What we call the industrial internet represents an opportunity for Europe to add €2.8 trillion to the GDP of Europe by 2030. Given the three per cent annual increase in industrial output in CEE, we need to nurture this high manufacturing presence with digital. If there were Digital Hubs and Software Development Centres all over the region, CEE would be in an ideal position to win the race on the industrial internet — and the market is there. In the past, less than one in five manufacturing companies used high-performance enabling technologies, sustainable manufacturing technologies or IT-enabled intelligent manufacturing. I am more than impressed by some examples, which show how the latest technologies that have been adapted in our region are going to revolutionise today’s methods of global manufacturing.

For instance, a third of the components being produced in the new GE Aviation turboprop engine manufacturing facility, in the Czech Republic, are going to be 3D-printed, which is what the industry calls Additive Manufacturing. The Czech government expects that facility to be the kick-off for high-tech investments that will create an entire industrial ecosystem involving suppliers and national R&D institutions.

I know that those technologies are real game changers for CEE. More highly qualified experts will be needed across the entire value chain. The challenge here is to avoid the often observed “boom and bust” cycle of prospering economies, which sees more investment, low unemployment and subsequent steeply rising salaries—without overall productivity being able to keep up. With productivity growing faster than salaries, if we want to stabilise growth, it will be essential to embrace the productivity opportunities of the industrial internet.

Countries and companies that adapt and change first will be the winners, and those who wait passively will be the losers. For CEE and the V4, strong collaboration with industry and the digitisation of industry and society are not just an option, but the only way to stay in business.

 

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The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.

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