Smart policies help Hungary’s MSMEs benefit from the fourth industrial revolution

The fourth industrial revolution offers a unique opportunity for countries with smart economic policies, which aim to boost energy efficiency and sustainable transport, to raise domestic value added and increase economic growth.

Such policies on one hand have to improve the ecosystem horizontally for business actors. On the other they have to target strategically important sectors, where digitization can have the most impact. Closing the productivity gap between micro, small and medium-sized enterprises (MSMEs) and large companies is another important factor promising large growth potential.

Accelerating digitization and converging towards a technology-driven economy can increase Hungarian GDP growth by an extra half percentage point each year until 2025, according to global management consultancy McKinsey & Co. Close to half of workforce activities in Hungary today could be automated by 2030 using technology that is already available, leading to greater productivity, the analysis shows. It is particularly the historically workforce-intensive and currently under-digitized sectors, such as manufacturing, agriculture and trade, show significant automation potential.

For a successful digital transition, Hungary adopted in 2016 the Industry 4.0 programme. This focuses on sectors that have already a strategic importance in the economy and in which digitization, higher research and development can considerably raise the value added content. These targeted sectors include the electric and automated vehicles; e-health; tourism; digital trade; and smart agriculture industries. Supporting MSMEs is a key aspect of the industry development strategy as these companies contribute 54% of Hungarian GDP and employ 70% of the nation’s workforce.

Some Hungarian MSMEs are successfully integrated in global value chains, especially automotive suppliers and pharmaceutical companies. However, most MSMEs are less productive than larger companies. Closing this gap in productivity and increasing the ability of MSMEs to bring innovative products and services to the market represent a major opportunity for improvement to the whole economy, given the high share of these companies in GDP and employment. In order to enhance their productivity the government is improving the business ecosystem for doing business and has introduced tailor-made development programs for MSMEs.

Hungary has reduced the administrative burden for business, including by introducing single window government services. By 2020, all public services will be electronic. The time to start a business has decreased from 3.5 days to 1 day and the cost of starting a business has fallen from €363 ($410) to 105. Most companies file tax returns electronically. Hungary has the European Union’s most competitive company income tax with a 9% flat rate. Research and development (R&D) costs can be deducted from corporate income tax bases.

Automation and digitization of the economy will cause significant shifts in the labour market. Reskilling the workforce is essential to manage this transformation. The strongest demand will occur for both basic and advanced technological skills.

The Hungarian Digital Education Strategy will introduce digital pedagogy methods in public education and will reshape adult and professional education. For example, it sets up hotspots for digital competence development to ensure digital learning workshops are available for adult education.

Meantime the ‘Program Your Future!’ scheme aims to increase the number of students that graduate in information and communications technology (ICT); improve the cooperation between the educational institutions and the ICT sector; and increase the popularity of technology-related professions. Furthermore, Hungary has introduced an education system for vocational schools and in tertiary education which is practice-based and builds on industry needs.

Innovation plays a key role in formulating the ecosystem. The renewed research and innovation strategy forecasts an increase of R&D expenses to 1.8% of GDP by 2020. It puts universities and science/technology parks at the centre of the innovation ecosystem.

Science parks create new business opportunities for MSMEs, which can collaborate with universities and other firms in R&D activities. One example is ZalaZone, a complex development project with the aim of providing an optimal test environment to electric, autonomous and connected cars incorporating smart-city and smart-road solutions. With this project Hungary is seeking to position itself as a R&D centre for modern mobility technologies (hybrid, electric and autonomous driving). The project is set up in cooperation with Austria and Slovenia. Leveraging strengths of neighbouring countries encourages regional cooperation and planning in R&D instead of developing solutions in isolation.

There are Industry 4.0 model factories in Hungary where 14 different types of technologies are showcased and MSMEs can learn about modern production management, big-data solutions, 3D printing and autonomous robots. With the help of mentors they can prepare their own intelligent factory development plan tailored to their needs and level of development.

Similarly, the Modern Business Programme aims at increasing digital entrepreneurship and digital skills of MSMEs as well as the professional use of ICT devices and applications. Currently, ICT experts are currently evaluating the digital maturity of MSMEs to determine how prepared a given company is to adapt to digital changes. Based on this evaluation a tailor-made ICT development strategy is prepared for the company to optimize and to automatize its production processes.

In the Supplier Development Programme larger companies help MSME suppliers develop and produce value-added products, adopt Industry 4.0 technologies and improve their human resources capabilities. Participating MSMEs can be integrated into the global supply chains as they become certified suppliers of multinational companies.

A new programme intends to build national MSME champions. It selects a set of MSMEs based on their growth and export potential. They receive tailored and special assistance including financial advisory services and grants to develop their products or services, promote their brand and company images and improve their production processes and corporate organizations. The initiative can serve as a paragon of what MSMEs can achieve by leveraging instruments available to all, inspiring other companies to follow.

Finally, MSME financing has improved remarkably in the last few years. Credit schemes as the Funding for Growth Programme of the Hungarian Central Bank have had positive effect on access to loans and MSMEs investment.