Budapest: Central and Eastern Europe’s innovation hub?

Budapest: Central and Eastern Europe’s innovation hub?

by Péter Csárdás

            A number of books and scientific articles deal with the evolution and functioning mechanism of clusters, but they fail to give a general definition which encompasses all aspects of these unique institutions. They agree however that a cluster is a great number of actors which operate closely together which grasps the essence of them: you know it when you see it. After the bust of Zsámbék, the „Hungarian Silicon Valley” whose story was discussed in this blog earlier, it makes sense to have a closer a look on a rather success story next door, namely the evolution of Budapest as an ideal location for IT giants as well as innovative tech start ups.

It all started in 1999 when the first building of Infopark was opened. The government and the private sector had a number of plans concerning the area between Petőfi and the then constructed Lágymányosi Bridge on both side of the river, and the establishment of the office park played a key role in the further development. In 2001 the new campus of Eötvös Loránd University (ELTE) was finished which together with the adjacent buildings of Budapest University of Technology (BME) formed a new center of scientific education in the Hungarian capital. 

These all fit well the seven determinants of a cluster: (1) it is spatially concentrated since the now eight towers of the park and the university campus are in walking distance from each other; (2) it is specialized, primarily for IT, telecommunication and software development companies. The cluster has diverse participants besides multinationals (3), including two universities, venture – capital companies, and now it hosts the European Institute of Innovation and Technology, an EU agency that was established in 2008 and choose Budapest for headquarter because of its leading role in innovation in the region. Furthermore, the participants compete and cooperate (4) with each other and now created a critical mass (5) of interests and ideas for the long run (6). Lastly, there is no doubt that residing institutions are active proponents of innovation (7). The success of Infopark led to the construction of two other entities: Science Park Budapest, an office park directly next Infopark, with Ericsson and Tata as its flagship research renters, and Graphisoft Park which offers research and development facilities and office spaces for Microsoft, SAP, Graphisoft, and other smaller innovative companies. A positive externality of the Budapest based R&D ventures is the boom of internationally acclaimed start ups which started their career in the city. Talented and well-educated people, who do not lack entrepreneurial spirit, have the chance to go big. Prezi and Ustream are just two examples of two ventures whose products are used by millions around the world.

In the location choice of the developers and the residing entities was most probably affected by a number of key factors. Innovation and technological education have had long history in Hungary which have been hurt partially during communist time, but gained momentum after the collapse the Iron Curtain, and they both have high potential in hand with talented youth. The country has a favorable location for multinationals and it has relatively cheap and well trained labor market. The actual government always has some kind of strategic plan about R&D, but the precious efforts sometimes lead to unwanted results (see the Zsámbék case). 

Currently the revised New Széchenyi Plan deal with the issue of innovation and sustainability that wants to achieve “competitiveness”, “jobs higher value added” and “sustainable economic and social development”. Furthermore it even specifies quantitative targets, namely to spend 1,5% of GDP on innovation by 2015, and 2% by 2020. The government can provide direct cash subsidy, tax allowance, training subsidy and job creation subsidy to achieve these goals. Despite of the ambitious plans private sector remains a key factor of the organizational and financial processes which hopefully can lead to the expansion of the now existing parks, and attract more innovative companies.  

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Silicon Valley à la française: Paris-Saclay

Silicon Valley à la française: Paris-Saclay

by Krisztina Horváth 

The case of Silicone Valley is probably the most iconic example of a so called innovation cluster, the notion that is commonly used to describe a group of densely linked organizations in the field of Research and Development that in some way benefit from the presence of each other. Due to many other similar success stories, the study of clusters became a center of interest and a fashionable approach in current economic policy. 

This great current attention on clusters requires some more concrete explanation that goes beyond the apparent magic. Clearly, the synergy of clusters is a result of opposing forces. On the one hand, common sense suggests that if many organizations tend to gather together at the same location they will end up with some costs arising from crowding. However, as a series of real life examples show, these so called congestion costs are highly offset by the benefits of being together. Let’s have a closer look now at these agglomeration forces through the example of Europe’s currently most ambitious innovation clustering project, Paris-Saclay.

Following the worldwide trends of cluster supporting in economic policy, in 2008 French president Nicholas Sarkozy announced the project of Paris-Saclay Campus, the development of a scientific supercampus from the merger of several universities and research institutes in the southern suburb of the capital. The ambition was not less than creating a scientific hub that is capable of competing with the world’s leading research universities.

One of the main missions of the project is to serve the convergence process between different fields of science. This interdisciplinarity is planned to be achieved by the union of universities from more than 10 different research fields such as Engineering, Physics, Social and Health Sciences with an integrated research infrastructure. According to the words of Sarkozy, ParisSaclay will be a “mosaic of institutions, each highly prestigious, but badly coordinated among themselves and separated by artificial institutional barriers that are totally obsolete in an era of global scientific competition.” 

The choice of location for the project is not a coincidence; Southern Paris has been a considerable concentration of R&D for a long time, with the presence of the prestigious engineering school, École Polytechnique or the great particle accelerator “Syncontron Soleil” for example.

In the beginning 23 organizations joined the ambitious project: state universities such as University Paris Sud 11, leading Grandes Écoles (HEC, École Polytechnique, Paris Tech, ENSTA, École Central Paris, etc.) and several national research organizations.

All of these leading French educational and research institutions committed themselves to move to Southern Paris and become a part of the new integrated campus and the joint super-university.

But what are the enormous benefits for which these prestigious institutions are willing to sacrifice a substantial part of their identity? Obviously, the most meaningful consideration in case of non-profit educational and research organizations is the access to a high concentration of financial sources.

First of all the French state invests billions of Euros in its vision of making Paris Saclay an internationally competitive R&D center as a coherent part of its „Competitiveness Clusters”, „Opération Campus” and „Investissements d’Avenir” programs, providing funding for new university buildings and expanding research capacity for example. Campus Saclay is also part of the giant transport development program called Grand Paris Project, as a result of which the integrated campus will be connected to the capital by the new suburban metro line, Grand Paris Express, making a smooth connection to the northern Charles de Gaulle Airport by 2020. 

On the other hand, many private companies are already attracted by the high concentration of human capital and research facilities in the science park. Large companies, such as Microsoft, EDF, Danone and Thales have established or are planning to move their R&D centers to South Paris, providing additional financial sources to the universities and research institutes.

Numerous other benefits of moving to Saclay can be mentioned, such as the facilitation of common projects, the easier exchange of researchers and the improvement of labor market connections between universities and private firms for instance.

There is nothing surprising in these motivation forces; they are the same for the formation of many other science parks in any parts of the world, but this project is rather unique in one sense: the French state is currently trying to achieve the topmost level of clustering, not only attracting the most prominent actors of the French scientific life to the same location, but also incorporating them into a common institutional framework, the future Paris-Saclay University. Whether this fact enhances further the synergies of being together or rather intensifies the difficulties during the transition process due to the fear of loss of identity will be answered by 2025.

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Silicon Valley in Zsámbék(?)

There's a next Silicon Valley being built right in our backyard. According to the numerous promises soon there will be one of the biggest technology (and a whole lot more) cluster in the world and Bill Gates drinking a Hungarian wine in one of the cellars in Etyek will be a regular sight.

Zsámbék - which was mostly famous for it's historical church - now will be the heart of innovation. So how can this nearly miraculous thing can happen? Well, all started off when Sándor Kenyeres started the Talentis Program in 2003 to enhance the exploitation of human capital in the region and to make the talented young people stay and flourish in Hungary. Of course the socialist-liberal government fully supported the idea and it's one of the few issues that is supported across governments - I guess everyone loves to hear that Hungary will be the leader in a certain field. What happened since then? Not much. But there's one question that's bothering me: why this project needs the financial support of the government? If the cluster is really a good investment, why won't the consumers privately invest to it...?

Let's take a look what does economic geography tells us about making such a cluster. To be successful we'll

need the following ingredients: Venture capital, Critical mass, Anchor firm(s), Social capital, Diversity, Appropriate Demand conditions. So what can a government do? It can't be a venture capitalist, since it's risk-averse and does a bad job. It can't be anchor firm either. And it can't influence the other points directly.

What it can do is to make indirect interventions or little nudges: enhance R&D, make the firms negotiate with each other, support universities and so on. An article made up a witty analogy: the government is the owner of a shell-farm and she wants to produces pearls. Now to make a pearls she needs just a small dirt to get into a shell, so the shell can begin to create beautiful pearls. Since we're talking about business, the bulk of the process is made by firms whom - just like a shell - can create value outside the clusters too. But if we run a mussel feeding company - under the title of a shell farm - we won't have pearls.

"Okay-okay, I get it" you might say "But most of the time theory tells us a lot of contradicting implications. What can we say about reality?" First, let's take a closer look at Silicon Valley in California. The major force behind it's development was Stanford University. Stanford University started out as an engineer school and dean of the engineering in the 1940's and 1950's encouraged the graduate students to start their own companies. This encouragement lead to companies today known as Hewlett-Packard, Varian Associates among other high-tech firms (note: they didn't get any state-subsidized loan for the start-up). And then slowly but steadily the whole region grew into the world's most innovative areas, which gave us the Internet, Google, the semiconductor chip, and the microprocessor. Today one-third of all the venture capital investments in the US happens in this small region. As you can see this cluster was entirely privately funded.

But we don't have to go that far to examine successful science parks. Cambridge Science Park is located in the UK near to University of Cambridge. It was a rural area until in the October of 1971 Laser-Scan, the first company moved into the region. Then the area started develop slowly as more companies joined the park. Notice that there were no direct state interventions, just the University of Cambridge promoted the park in the late '80's and the beginning of the '90's. All of the companies came here just to do business and not because the government gave away subsidies or such.

So the bottom-line of my whole argument is that we should be at least skeptical about this 'Hungarian Silicon Valley'. As you can see both of these examples had famous, research-intensive universities from the start. How many famous, research intensive universities we have in Zsámbék? None. How many research institutions we have in Zsámbék? Zero. Also, the development of both of these clusters were very slow, we can't just hurry the whole thing. And if one needs the direct intervention of the state (and not just small nudges), then something isn't right. Government has it's comparative advantages, but none in business.

That's the job of the private sector.

Balázs Stadler

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The Success of ZGC Science Park, China

by Anastasiia Shirinina

In the 1980s, the idea of a science park establishment quickly moved beyond the Western countries and parks were also established in Brazil, India, Malaysia, in the former "Eastern Bloc" - in Eastern Europe, CIS and China.  There are about 400 science parks created in the world today. Many others are in the process of creation. The success of science parks in promoting technology transfers and attracting clusters of technologically intensive and innovative firms has motivated countries all over the world, including China, to give an incentive to regional development. Due to the economic significance of China, its unique and complicated political and economic structure, the increasing number of foreign investments targeted to diverse spheres of Chinese economy, its considerable integration into global economy, the Chinese model of science parks can be a very peculiar example.

Zhongguancun (ZGC) Science Park in Beijing is the first and largest science park and cluster of semiconductor, computer, telecommunications and other firms in China. This park is not only a considerable income and research contributor of the economy, but also it bears a historical significance in providing the important transition from government control to relative freedom; moreover, it gave a rise of technological creation and transformation, new science parks foundation based on the government strategy to promote science.

The huge Chinese Zhongguancun Science Park is integrated into the city of Beijing, what is a very typical trend in the last quarter century - "science park in the city",  what makes it easier to connect innovators with financiers, moreover, the park itself reinforces the development of the city. However, all fragments of the parks are located in different parts of Beijing, where the large sub-parks usually have own specialization: software and electronics, new energy and industrial design, new materials, biotechnology, medicine, digital media, creative industries, etc.

There are over 22,000 companies (9 per day were recorded at the peak of development) and about a million employees in this park. No other places in China have such a large pool of talents as ZGC Science Park does. This is the "youngest" region in China - the average age of people here does not exceed 30. Park consists of more than 30 leading universities like Peking University and Tsinghua University, over 200 research institutions represented by the Chinese Academy of Sciences and Academy of Engineering, the largest national library in Asia, and the State Patent Office. The average annual income of the ZGC Park is $75 billion, including 650 companies with annual income more than $10 billion. The park is developing rapidly: profits volume of scientific and technological development has increased by 30% per year at the end of the last century, in the last decade it gave a steady growth over 25% per year.

It all started in October 23, 1980 - one of the scientists from Chinese Academy of Sciences Chen Chunxiao opened the first office of technological development at Zhongguancun street. Chinese economy at the time was in the rapid process of transition to a market economy and was extensively developing. After six years there were about 100 innovation companies, dealing with electronic equipment and marketing. The street became known as "e-street".

The computer era and then Internet era came. Communist Party of China quickly realized what an important phenomenon emerged in the street Zhongguancun, and decided to support it. In June 1999, the "Zhongguancun Science and Technology area of development" was officially opened under the motto "develop science and technology for the construction of the state." This is how the first Science Park appeared in China.

Zhongguancun Park has been created and developed as a top national project under the strict guidance of the Chinese government. However, in August 18, 2000 (almost a year before WTO accession) it was privatized to Beijing ZGC Life Science Park Development Co., Ltd. what was approved by Beijing Municipal Government. This was a breaking point and significant step to marketization of the economy and reason for a rapid rise of the other science parks and scientific centers which are more than 130 nowadays. However, the state still takes careful care of these research parks.

The park has large information, industrial and experimental base.  There are more than twenty multinational corporations’ branches opened here. They are attracted not only by the Chinese government’s subsidies, but the main reason is that the global giants are interested in the local market where they have an immense opportunity to promote their innovative products.

Many important discoveries were made in ZGC Science Park, like the first set of printing technique of Chinese characters, the first crystal of large integrated circuits with millions of subscribers. The first China's commercial Internet was opened here. Thanks to Zhongguancun China achieved the international communication and information standards.

Along with science parks a program of "100 Talents" has been developed: every year 100 brilliant scientists from around the world were invited to work in China, being offered very high salaries. Moreover, a large ethnic Chinese group who had worked for the Silicon Valley companies came back to PRC and led strategically important companies, became the directors of research institutes or held other important positions.

All these achievements and results prove the success of the first and the biggest ZGC Science Park in China, Beijing.

Figure 1. ZGC Science Park Map in 2006

Figure 2. ZGC Science Park Production Distribution

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Skolkovo – the Heart of Russian Modernization

by Aleksei Khlystun

20 years after the collapse of Soviet Union Russian economy is still backward and highly uncompetitive. The major source for resent growth is constantly growing commodity prices which are heavily exported abroad. However, during financial crisis when drop in oil prices led to 7% contraction of GDP, government realized scale of structural problems and in 2009 announced federal program of economy modernization. The aim of this program is to develop new innovation industries, improve competitiveness of domestic producers, and achieve higher levels of economic growth. To accomplish this ambitious goal, authorities decided to utilize development of innovation parks.

The first step in this direction was made in 2010 when federal law “About innovation center “Skolkovo”” was signed. This so called Russian Silicon Valley is expected to be fully completed by 2015; some parts were completed earlier in 2011 and have been already used. Skolkovo project aims creating of environment which will promote concentration of intellectual capital and leading global companies which through cooperation can generate innovations and progress. It will specialize in priority sectors of economy modernization: space and telecommunications, medical technology, energy efficiency, information technology, and nuclear technology. Each of these areas will get own industrial cluster where Russian and foreign companies will work together. Industrial clusters will be situated around main technological park where participants will have necessary facilities, research equipment, scientific and technological expertise, interaction with venture funds and business support.

Given the level of priority devoted for the project, the government approved various benefits and exemptions for companies operating in Skolkovo, including:

• Pay VAT on the general terms or obtain an exemption;
• Pay income tax on the general terms or obtain an exemption (until accumulated profits reach 300 million rubles, profit tax rate is 0%);
• Pension fund contributions at  reduced rate - 14%, payments to the social insurance and mandatory health insurance funds eliminated;
• Organizations are exempt from property tax and land tax;
• Customs duties and import VAT on imported equipment will be offset by a subsidy;
• Simplified work permit procedure for foreigners.

These measures can significantly facilitate operation of innovation companies and provide some incentives for foreign companies to enter and invest into development of Russian economy.

Funding for innovation center will come from the federal budget to develop logistic and scientific infrastructure. Other expenses, related to the commercial environment and innovation projects, will be co-financed. In 2010, $150 million has been allocated from federal budget, in 2011 - $500 million, in 2012 - $730 million and in 2013 - $600 million. Moreover, following companies agreed to provide venture capital for innovation projects in Skolkovo: VTB Capital, Softline, Pangaea Ventures ($20 million), Runa Capital ($5 million), etc. In total, venture capitalists have committed around $260 million. As a result, of this domestic and foreign capital inflow, Skolkovo has already funded 40 start-up companies with $200 million. These companies cover wide range of innovations: visual search, cyber attacks security, 3D animation, data analysis, etc. In total by the end of 2013 Skolkovo will distribute $1 billion for start-ups.

In addition, like in many traditional innovation parks, operation of Skolkovo will be based on the close cooperation between universities and companies. For this purposes, the Moscow School of Management was opened here to teach new business leaders. But the real achievement is that in 2011 an agreement between Skolkovo and Massachusetts University of Technology (MIT) was reached to establish joint Skolkovo Institute of Science and Technology (SIST) which will be capable to integrate business and innovation in educational programs and scientific research. Both of these universities will create pool of qualified labor force for local companies and research centers.

Skolkovo graduates most likely will find job opportunities very quickly since already 200 companies registered there; in the future this number will reach 800. What is more important is that Russian innovation park already managed to attract global high-tech titans such as Intel, IBM, Microsoft, General Electric, Siemens and Sisco. These companies already agreed to open their R&D and production facilities and provide capital for development of Skolkovo. For example, just Sisco alone is willing to spend $1 billion on development of their research facilities. Attraction of foreign is extremely important for success of the project since they can bring additional FDI, enhance image of the project and create necessary critical mass for innovation progress. In the near future ABBYY, Novartis, Honeywell, Airbus, Alstom, DuPont, Google, Kodak, and John Deer can join Skolkovo.

Skolkovo is relatively new project, so it is hard to judge about its success or failure. Even though, some minor projects, as program for improvement of utility sector efficiency and development of business incubators, were completed, according to estimates it can take 15 years for Skolkovo to produce feasible results. At the current stage, creation of Skolkovo Institute of Science and Technology (SIST) in partnership with MIT can be one of the greatest achievements which in the long run can boost innovation acceleration and knowledge spillovers in the innovation cluster. Moreover, it worth to highlight positive dynamic with which Skolkovo attracts big international players and venture capital and subsequently funds new startups (more than 40 in less than year). However, due to country specifics the future success of the project will depend on government policies effectiveness to mitigate problems associated with Russian business environment and stimulate positive dynamic between participants of Skolkovo.    

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Ingria Techno Park: A Promising Start

by Tetiana Protasova

Among the many incubators and techno-parks of Russia, Ingria proudly stands out from the crowd. Not only does it possess a substantial amount of capital (the total volume of investment in the creation of Ingria techno-park equals to 720 ml euro , but it also seems to have learned a lot from the success and failure of similar projects worldwide.

Overcoming Superficiality

Russia currently harbors over a hundred business incubators, most of them financed publicly. The standard list of services provided to the residents includes: free or under-priced office premises, conference rooms, channeling communication with investors and potential clients and mentoring. However, to-date most Russian business incubators and techno parks have not yielded any substantial innovations. World practice shows that getting the money and building a large office block is not enough for a government-initiated project to work. Similar to having the water fill the banks of a river, human capital in the face of incubatees and small businesses along with prospective investors need to come together, and with a bunch of innovative ideas, bring life to the freshly-built premises of a techno park. No wonder such concept as virtual incubators is up and running - material endowment can only be extra to knowledge and networking.

Good Examples

The number of successful enterprises that have left the incubator is by far the most important signal for the prospective incubatees. “The fact by itself that a business incubator has tenants is not a proof of success; the latter can only be decided if we are able to examine the incubated clients and their survival rates in a perspective of 3-7 years.”  Ingria has only been launched in 2007, and with such short history it is too soon to label it complete success, however its pilgrims have gained merit even in this short time frame. Ingria currently harbors sixty-four residents , many of them about to leave the nest of the incubator. Those who already did, are currently co-owned by big international corporations and appear to stand on solid ground.

Media and Culture

Another important success factor of a techno park is its popularity in the media and the familiarity with the concept of incubation in the society. Given it is a fairly new concept for this part of the world, incubation appears to gain popularity among the progressive Russian youth. IT specialists are in the forefront, as Internet is flooded with information concerning incubators and the success stories worldwide.  Further, ideology plays a crucial role in attracting IT specialists to business, as the popular US movies  give a sense of courage, and a feeling that a good concept and a will to succeed are enough to make a break. The fact that Ingria cooperates with all the major universities in St. Petersburg is also a good sign. Universities can offer entrepreneurs equipment, laboratories, training programs and special services that would not be available to them in their own organizational framework . Students and fresh graduates, having closely observed the incubation while studying may also aspire to become a resident, to invent and to cooperate. Acquiring professional skills and specialization is also easier and faster when a student knows what skills he would require after graduating.

Reasonable Eligibility Requirements and Transparency

Eligibility criteria has to be clear and reasonable in order to attract innovative projects. For instance, one of the requirements introduced by Skolkovo is to have at least one foreign specialist on your team when you apply for their residency. No wonder Ingria is already 2 years ahead of Skolkovo . According to Russian press , Skolkovo simply doesn't want to attract prospective specialists, it is said to harbor corruption, as the sphere of nanotechnology is difficult to monitor. This is why Ingria's apparent transparency, ensured by regular report publication, statistical data provision and the support of large multinational corporations is a good start to attract further success.

Hopefully Ingria will continue the inspiring trend and will further serve as a fine example of wise policy-making to science parks, incubators and innovation clusters in other developing countries.

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