Cheap but reliable | Innovation and startups in the CEE region - Part V.

Cheap but reliable | Innovation and startups in the CEE region - Part V.

Many talented professionals, lots of public money, and plenty of success stories, yet something is missing. Why has Hungary failed to catch up with the European average in innovation and digitalization? We discuss Hungary in part V. of the series.

Talented, skilled professionals, and simple process to start a business

There are many indices, indicators, and benchmarks to measure how innovative, digitized, and startup-friendly a country is. The sad news is that in most of these rankings, Hungary is below the EU average and underperforms in international comparisons. Yet, there are a few promising areas where although there is still room for improvement, the country can be competitive in the long run.

One of these areas is human capital, meaning people’s digital skills in this case. The share of IT graduates among all graduates is above the EU average, but the percentage of IT professionals among all employees is below, though it is slightly increasing. Hungarian IT experts are respected not just at the regional level but also globally.

Nonetheless, the real strength and the main competitive advantage of the Hungarian IT workforce is that it is cheap. Due to many reasons, it is much cheaper to employ a Hungarian programmer than a Western professional. On the other hand, only half of Hungarians have at least basic digital skills, and the proportion of those with basic software skills is also low.

Besides human capital, we should mention the easy process of setting up a company in Hungary; it barely takes more than one day. This is a crucial aspect as the fewer obstacles are in the way of potential entrepreneurs, the more motivated they will be to act. As a result, Hungarian entrepreneurial activity is well above the European average, thanks partly to the government’s decade-long policy of favoring small and medium-sized enterprises.

Moreover, the cost of living, including housing, is much lower in Hungary than in most European countries, and Hungarians can also be proud of a relatively advanced network infrastructure. These factors can make Hungary an attractive destination for digital nomads who want to settle down for a while. Lastly, Hungary grants tax advantages to business angels, making, at least according to StartupBlink, a global research center, the country a very investor-friendly place.

A képhez tartozó alt jellemző üres; innovacio_magyarorszag-3000x2122.jpg a fájlnév
Réka Pisla | Hype&Hyper

Eco-innovation in Central and Eastern Europe?

The country is lagging far behind on innovation; most companies are not advancing their products and internal processes, which will have a substantial negative impact on competitiveness in the long run and will significantly damage the Hungarian economy.  According to the European Innovation Scoreboard’s terminology, Hungary is an „emerging innovator.” But, the most recent Innovation Index of the K&H Group shows some improvement, and this trend has not yet been broken by the negative impact of the Russo-Ukrainian war.

Balázs Németh, K&H’s chief innovation officer, said at a press conference regarding K&H’s Innovation Index that the figure rose to 30 points in the first half of the year, up from 28 points in the previous survey. The 2-point increase compared to the second half of 2021 is mainly due to already implemented digital developments and projects still under implementation. The digital innovation sub-index increased significantly by 5 points, and none of the sub-indices decreased, meaning that companies continue to make innovation a top priority.

The survey revealed that digital innovation happened mainly in back-office processes and logistics. Medium-sized enterprises in the retail sector with a turnover of between HUF 300 million and HUF 1 billion were especially innovative in the examined period.

One-third of the companies surveyed have made investments with a positive environmental impact. Eastern Hungarian companies performed above average regarding this figure, and the number of firms specializing in environmentally friendly developments has also increased in this region.

Hungarian startups get support

According to the data of StartupBlink, Hungary’s startup ecosystem is ranked 39 out of 202. There are many startup events, contests, workshops, local and international conferences, meetups, and last but not least special events for women in the startup industry. Budapest, the Hungarian capital, holds many high-profile events such as Brain Bar, global hackathons, and meetups.

There are incubators, accelerators, and community offices in Hungary, which are the traditional core elements of a startup infrastructure. Budapest is the home of Design Terminal, Central and Eastern Europe’s leading innovation agency with incubation and acceleration programs. The country’s startup world’s primary focus is education, mobile apps, and environmental protection. Startups can use community offices, have ongoing contact with mentors, and access a community of experts and Google’s, IBM’s, and Amazon’s services.

Another relevant institution is OXO Labs, which helps Central and Eastern European startups to scale their products and enter the global market. Every year, 15-20 teams are selected to participate, and the best startups can aspire to €200,000 in project funding from angel investors. OXO Labs also helps project participants to find investors.

Start it @K&H, founded by K&H Bank, is a technology incubator and community platform for Central and Eastern European startups. Participation is free, offices are provided to the startups, and they can regularly contact mentors.

Global successes

According to Corvinus University of Budapest’s research on the Hungarian startup ecosystem, most Hungarian startuppers have an IT background and are typically between the ages of 26-50.  Gender imbalance is significant, 86% of Hungarian startuppers are male, and only 14% are female.

Prezi, a cloud platform for creating high-quality, eye-catching presentations, is one of the well-known, if not the most famous and widely used, Hungarian innovations. The Budapest-based software company was founded in 2008 and has raised a total of $72.8 million. Today, besides Budapest, the company has offices in San Francisco and Riga.

LogMeIn is another startup Hungary can be proud of. In a nutshell, LogMeIn is a software that gives users remote access to computers and their administration. Moreover, it is also a major player in password management. Their product, LastPass, lets us forget our passwords: we do not have to deal with them because LastPass can securely manage them for us.

Ustream, a streaming service launched in 2007, is also a Hungarian success story. Today it has offices in San Francisco, Los Angeles, and Budapest. The company’s last investment round was closed in 2011; now, the total capital raised is $103.8 million. IBM acquired the company in 2016, and two years later, Ustream was renamed IBM Cloud Video. Their client list includes big names like IMG Media, Viacom, PBS NewsHour, CBS News, Logitech, Samsung, and Panasonic.

Behind all these successes is Hungarian talent, but also American capital. Hungary has a very small internal market. Even if we consider the whole region, finding a venture capitalist with enough money to scale a local startup to the global level is very difficult.

In addition, there are newer projects such as Barion Payment, which has managed to stay in the EU and expand here. Barion is an online and mobile payment service that allows tracking purchases, transferring and receiving money without commission, withdrawing cash, and managing credit cards. It already has one million users, and the app can be used in 20 EU countries.

Public funding and policies

Public funding and policies play a crucial role in developing the Hungarian innovation and start-up ecosystem. For instance, Hungary is home to Hiventures, one of Europe’s most significant publicly funded venture capital funds, managing a startup fund of roughly $220 million.

János Csák, Hungarian Minister of Culture and Innovation, announced at the award ceremony of the 31st Scientific and Innovation Talent Recruitment Contest for Youth that Hungary will increase its R&D and innovation spending from the current 1.6% to 3% by 2030. This means that catching up will finally be prioritized, and more money will be injected into Hungary’s innovation ecosystem. According to the European Innovation Scoreboard, Hungarian government support for business research and development was one and a half times higher than the European average in 2021; but this figure can now rise even further.

To sum up, there is much potential in Hungary. The factors that primarily determine the country’s competitiveness are the highly skilled but affordable workforce, the low cost of living, and the 9% corporate tax rate, which is the lowest in the European Union.

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