What are startups, and why is it worth supporting them? Is AI taking over our jobs? Innovation is a topic repeated a thousand times, but maybe not often enough? We discussed these questions with Zoltán Cséfalvay, Ph.D.
Many predict that boosting the startup industry and supporting startups is the future since they highly contribute to economic growth. Why do you think startups are that important?
Startups are the economy’s dynamism, and if there is no dynamism, there is no growth. It is quite visible now that a significant shift started in Hungary about five to eight years ago. We have come as far as we could with the model of economic development based on imported technology, imported capital, and cheap but relatively well-educated Hungarian labor. This is the reason for the economic growth of the last fifteen years. Now we are in a big transition to reach innovation-led economic growth. And who can we expect innovation from? From new enterprises, and startups, of course. Large companies constantly trying to innovate the same product are usually incapable of breakthrough or disruptive innovation. We expect these from the new businesses. It is in the fundamental interest of all countries to make progress in this field.
How has support for startups changed in recent years in Europe and particularly in Hungary?
The government can do many things to help startups. It can ensure the right environment, such as legal certainty because we need sophisticated legal instruments that make patenting, for example, easier. The state can also encourage the startups, though it cannot bear the risk and make the innovation happen instead of them. Startups are created in a competitive environment and must be successful on a market basis; they either succeed or fail in the competition. The stronger the competition, the better. If competition is not dominated by a few large corporations in a field, smaller startups have a much better chance. We should not forget that what startups are really strong at is intellectual capital and its exploitation. Most startups operate in the digital economy and can therefore grow very quickly.
Startups have a very strong employment creation effect. In fact, startups contribute to a large part of employment growth in developed countries. In the sectors where large established companies are dominant, much automation happens. Automation might lead to job creation through new investments, but only if it is supported by economic rationale. In all other cases, startups create new products, develop new business models, and open up new markets. Often a market that did not even exist before. In addition to competition and effective regulatory frameworks, a proper financing system is also essential for success, as banks cannot take startups’ risks. Thus, startups are predominantly funded by venture capital, but this does not mean that public support is not sometimes needed. We should not forget that creating a startup is mostly a university activity. Student-age founders build most startups. Of course, if we look at an exact definition of a startup, we get that it is a company that is designed to grow quickly. There are many other definitions, but the emphasis is on fast growth. Good universities are essential for startups, just as an ecosystem, so a supportive, helpful institutional structure with venture capitalists and angel investors. The ecosystem comprises many elements, but if it is well coordinated, success is almost guaranteed.
In a previous interview, you mentioned that it will be interesting to see how the startup generation that emerged during the COVID-19 pandemic develops in the future. What are your predictions on this?
On the one hand, the pandemic has made a selection among startups. But we should not forget that most startups operate in the digital economy, and if that period has a winner, it is undoubtedly the digital economy. I am not talking just about big corporations like Zoom and online delivery service businesses, but the whole industry.
How much will future technologies make our lives easier? More and more studies are being published on the adverse effects of social media, for example.
We should not forget that we live in a market economy. And in a market economy, businesses produce what we consume. If we want to consume something, they make it; it is a straightforward story. So, I understand that Facebook has a significant role in creating filter bubbles and echo chambers, but what I always say to that is that let us make a new startup that creates a social media platform where people can debate each other. Why would it be impossible? There is a problem called the „exponential gap.” The digital economy is growing exponentially, but the changes in our lives are more linear, so there is a gap between the two. But we should not forget that if there are 4 billion consumers, then that is what we wanted.
Robotization and automation are dominant trends, from industry to office applications. What are the particular robotization trends in Europe, especially in Central and Eastern Europe?
The COVID-19 crisis has accelerated automation in office work. We see now that much of the routine office work is redundant, and automation is a response to this. This trend is very likely to continue. However, a distinction must be made between physical robots and those robots that are essentially an algorithm or software, simplifying administrative workflows. In the industrial sector, physical robots are already working in all areas where they are needed, and software robots will change everything related to administration even more in the future.
How can the labor market respond?
Companies that use new technologies are more productive, so they can sell their products more easily and faster. As demand grows, this process increases employment. More precisely, the gap will always be between those at the cutting edge who can apply new technologies and those who cannot. Those companies that adopt the latest technologies will see an increase in employment, while those that cannot, will face difficulties that may lead to workforce reductions.
Startups are not only creating new products; they also open up new markets leading to new consumer needs. Additional labor is needed to meet these new consumer needs. Therefore, total employment will not fall.
Can everyone be retrained for another job? And who is responsible for retraining?
Obviously, the simplest answer is that it is the individual’s responsibility. Of course, the state can also help, though not a lot, as the government does not know what kind of occupations are needed. What is more, not entire professions are disappearing; they are just getting radically transformed. An occupation is called the same as it used to be; for example, photographers are still called photographers, but they are doing a completely different job now than they did five or ten years ago. Five years ago, they did not upload the photos to the cloud, and twenty-five years ago, they went home, developed the image, enlarged it, and that was how they created their final products. If we look at this example, photographers who have been missing out on learning the basics of digital photography may find themselves without a job, while new photographers will enter the market who can keep up with the pace of development.
What are the prospects of Central and Eastern Europe in technology?
Every region and every country must find a niche market where it can be truly competitive. Central and Eastern Europe is highly competitive in manufacturing. More specifically, our region has a significant competitive advantage in the digitalization of manufacturing. It makes much sense to build on this competitive advantage. Of course, Hungarian startups, for example, are very successful in other fields, too, like medical instrumentation or biotechnology. So, it is worth paying attention to these areas as well.
Zoltán Cséfalvay, Ph.D. is the Head of the Centre of Technology Futures at the Mathias Corvinus Collegium. Previously, he was a senior researcher at the Joint Research Centre of the European Commission in Seville. He served as ambassador of Hungary to UNESCO and the OECD in Paris and as Secretary of State for Economic Strategy at Hungary’s Ministry for National Economy between 2010 and 2014. He is the author of several renowned books and articles; his main research area is future technologies, particularly the economic dimensions of startups and innovation.