The European Commission’s report on Hungary was just published. The report assesses our country’s development in several important policy areas and offers some recommendations. One of the main areas where it finds reform to be crucial is that of national competitiveness and investment, with a special emphasis on investment into intellectual property.

The chapter that focuses on these topics relies heavily on a report that our team has prepared for the European Commission. In particular, this documented the sluggish productivity growth observable in domestically-owned firms, and foreign-owned firms’ comparative, but in an international perspective minor advantage. With respect to investment, we found that while recent low interest rates and economic growth led to an increase in overall terms, investment into intellectual property is still lagging behind the EU average.

Innovation activity in the private sector is also below the EU average, and it is mainly observable in large, foreign-owned firms, who are supported by governmental subsidies. Public sector innovation, similarly, is below the EU average of 0.7%, and has fallen since 2006 from 0.49 percent of the GDP to 0.35 percentage.

In the European Commission’s report, a special box is dedicated to our report’s discussion of Hungarian ‘zombie’ firms. This term refers to unproductive, financially unviable firms whose presence, to a considerable extent, is responsible for the lower aggregate productivity growth and investment. In 2012, 6 % of all Hungarian firms could be categorized as `zombie’, and these firms employed 10-15% of the country’s working population. Their share after 2012 has decreased, mainly in result of the central bank’s intervention aimed at reducing these firms’ debt burden, but the data indicates that this policy was not sufficient to help them find an efficient way to grow, rather it has only prolonged their existence.

The report can be read here.