Relocation of software R&D: the case of Hungary Magdolna Sass Institute of Economics of the HAS and ICEG EC Hertfordshire University, 2-3 September 2010

Research supported by IPTS Separate research on ICT R&D in manufacturing and in software, however intertwinned to a large extent Work in progress

Background Rapid growth of internationalisation of corporate R&D activities, including software – contrary to the developments beforehand (while other functions are increasingly outsourced and offshore outsourced, R&D is kept at the headquarter) After 2000: FDI flowing into software in Hungary Increase in software output and export in Hungary, balance of trade turning to positive in 2007 Increase in ICT services R&D, mainly software According to the “fields of science” classification, more than ten per cent of total Hungarian R&D expenditures were spent in informatics in 2008, the second highest after chemicals. Inside informatics, software dominates similarly to other NMS. Companies dominating (share: 56 % in 2007 in total spending), universities follow (33 %), government only one tenth – for total R&D: government dominating Share of foreign owned affiliates in business R&D exceeds the world average since around 2003

Export, import and trade balance of Computer and information services, (million euros)

Number of firms by number of employees in NACE 722 (Software consultancy and supply), 1998 and 2008

Illustration: two cases 1.Graphisoft’s predecessor was established in 1982 by Hungarian private persons (three engineers). It transferred its headquarter to the Netherlands in 2001, and in 2007 it was bought by the German Nemetschek AG, a competitor company. It produces packaged achitecture design software, it was a world market leader up till 2001, now it is second behind a US company. The total number of employees is above 400, of which more than half is R&D. Main product: ArchiCAD, sold all over the world. It has representative offices in many foreign countries mainly for trade pruposes. 2.Ericsson was the first to set up a large R&D facility in Budapest in 1996, employing several hundreds of engineers specialised in networking and in software engineering for telecommunications. Their research laboratory, the Inter-University Centre for Telecommunications and Informatics, operated jointly with the Budapest University of Technology and Economics and the Eötvös Loránd University. It is now the 5th biggest company in terms of ICT R&D in Hungary. It employs more than a thousand employees, the majority in R&D. Interestingly enough, there was/is no manufacturing production carried out in Hungary.

Theoretical background Sachwald, 2007: global innovation networks with more countries participating typology of foreign R&D units: 1.Local development centre (LDC) (traditional: supporting production abroad, in the host country) – most numerous 2.Global research laboratory (GRL) (home-base augmenting R&D units) – less numerous, mainly in developed countries, esp. in the US, agglomeration effects and local technology/knowledge 3.Global development centre (GDC) (in charge of R&D tasks which can be separated and plugged back into the innovation process of the MNC) – emerging, number increasing, besides developed countries, less developed involved, including India, China and CEE Distinction between vertical (supply-driven, efficiency seeking) and horizontal (demand-driven, market seeking) FDI (Barba- Navaretti, Venables et al., 2004, Caves, 2007, Dunning, 1993) – GDC is close to the concept of vertical, LDC more horizontal

Data and measurement problems Data not detailed enough (do not go down to software for many data categories), data on R&D lacking Problems with identifying software R&D (acknowledged even by the Frascati Manual) Significant software R&D spent outside the software sector (e.g. related to automotive, electronics etc.), „fields of research” data – but few

Method Because of data and measurement problems, semi- structured interviews with leading managers of nine companies in the sector The companies were selected on the basis of compiled list on the basis of secondary information sources of the largest companies, supplemented by small sucessful companies and some medium companies Their balance sheet data and other sources of information (websites, newspaper articles etc.) were also analysed Interviewed companies: Ericsson, Evosoft, Siemens PSE, SAP Hungary, Graphisoft, AITIA, evopro, 4DSoft, Morphologic. Data on the following companies were also analysed: Nokia Siemens Network, Globenet, Kürt, Philips, Synergon, Onlinet, Tata.

Aims of the research Identifying the most important corporate players in Hungarian software R&D Determining the main characteristics of Hungarian software R&D

Results 1 Statistical data underestimate software R&D in Hungary: six of ten companies did not register neither R&D expenditures nor R&D employees, while they carry out mainly R&D activities Especially for affiliates of MNCs there is no special interest in registering (all) R&D + data distorted by transfer pricing For Hungarian owned companies there is an incentive (reduction in the tax base), in spite of that it is registered only rarely

Results 2 Dual structure in software R&D: large affiliates of large MNCs with large turnover and employment, high export/sales ratio – small-medium sized Hungarian companies with low export/sales ratio, lower employment and turnover Exceptions1: Graphisoft, Kürt – (formerly) Hungarian owned, medium sized but high export intensity, quite well known abroad with offices/plants abroad, operate in small market niches Exceptions2: a few small sized Hungarian owned companies – leading companies in a small market niche, „born globals” with plants/offices abroad and high export intensity, e.g. Onlinet, NavNGo

Results 3 Foreign owned affiliates: usually of vertical nature, supplying in Hungary usually only their own affiliates (if any), export dominating Mainly of German and Scandinavian origin („intra-EU” internationalisation of software R&D) Destination of their exports: EU („intra-EU” internationalisation of software R&D) Hungary: relatively important for Indian investors in the sector (Tata, Satyam), but they do not carry out R&D, only much less complicated tasks are transferred here (adaptation), more „nearshoring”: being closer to European clients Activity/type: mainly GDC, LDC less (together with GDC), GRL no Task: mainly application software and producing parts of more complicated tasks with a few exceptions as opposed to internationalised Hungarian owned companies, which carry out more complicated tasks and prepare final products

Results 4 Agglomeration effect important: two main sites in Budapest, and/or close to other affiliates of the same MNC (including Hungarian owned larger and/or more internationalised ones) In the countryside: only university towns with strong research facilities and capabilities in the given sector can attract smaller plants – in many cases the Budapest plant is „in charge”

Results 5 Foreign affiliates - vertical locational factors: availability of relevantly skilled labour at lower prices + low cost of disintegration of production (mainly good telecom) + other cost reducing factors (proximity) Hungary has a competitive advantage in the sector, due mainly to its relatively good education system and strong tertiary education in mathematics and informatics in certain universities, proximity (EU) Impact on the host economy: limited backward and forward linkages, however, all have close contacts and cooperation with local universities, all involved in various research projects (EU or locally financed), and spillovers through the movements of skilled employees to the local economy, universities – significant in the sector

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