The real gap in competitiveness and innovation is not between the US and China on the one hand and the EU on the other, but rather within the EU. In particular, Central Europe lacks world-class academic institutions.

It is often taken for granted that the Sino-US technology race has marginalised the European Union. This perception, however, is belied by the most recent Global Competitiveness Report (“report”) by the World Economic Forum (“WEF”) which ranks four EU member states (Netherlands, Germany, Sweden, and Denmark) among the world’s 10 most competitive economies.

The report defines “competitiveness” as a set of “attributes and qualities of an economy that allow for a more efficient use of factors of production,” particularly total factor productivity (“TFP”), which is a measure of long-term sustainable economic growth that cannot be explained by the traditional inputs of labour and capital.

Technological innovation and efficiency in input use are considered the most important elements of TFP.  Therefore, the report’s Global Competitiveness Index (“GCI 4.0”) can be thought of as a ranking of countries by their TFP. Thus, the Netherlands is ranked as the EU member state with the highest TFP and deemed best positioned for long-term sustainable growth.

A real gap

While the report can be considered good news from the viewpoint of EU’s overall positioning in the global tech race, it delivers decidedly less good news for Central Europe, including the V4. The report clearly demonstrates that the real gap in competitiveness and innovation is not between the US and China on the one hand and the EU on the other, but rather within the EU.

This yawning gap is between the EU’s four most competitive economies and the “laggards,” consisting of the V4, the rest of Central Europe and most of Southern Europe. France and Spain are somewhere in-between.

The table below summarises selected key rankings of the V4:

The GCI 4.0 ranks 141 countries, with Singapore resulting the world’s most competitive economy (the US being ranked nr. 2) and Chad the least competitive. Each overall ranking is a result of rankings on 12 major elements or “pillars.” Thus, innovation capability and institutions are among the 12 pillars.  The ranking on each pillar is the result of rankings on lower-level components.

R&D is a component of innovation capability, while the governments’ long-term vision is a component of institutions (see the first appendix of the report for a full discussion of the GCI 4.0 methodology). For purposes of the table above, innovation capability is highlighted as a general indicator or proxy for the V4’s overall rankings, while institutions are highlighted as an echo of the “quality of institutions” theme of the EBRD’s 2019 Transition Report.

While the table above is essentially self-explanatory, a few comments may be useful.

First, the V4 rankings on institutions are highly discouraging, illustrating a serious drag on overall competitiveness. For example, the quality of Costa Rica’s institutions (54th) is deemed by the report higher than Poland’s.

Even more disastrous are the rankings on governments’ long-term vision, for it seems that V4 governments are essentially deprived of a long-term vision required for attaining higher levels of overall competitiveness. For example, the Dominican Republic appears to have a more long-term vision (95th) than Slovakia.

Second, Czech Republic clearly leads among the V4 as the most competitive and innovative economy. Within all of Central Europe, it ranks nr. 2, barely notched out by Estonia (ranked 31st in GCI 4.0). There is no doubt that Czech leadership within the V4 is largely a function of its R&D spending.

The table below summarises the key data on R&D spending in the V4 (all data are for 2017, the most recent available):

While still much below the R&D spending by EU’s innovation leaders (eg: Sweden – 3,33 per cent of GDP), the Czech R&D spending is nevertheless very impressive and only slightly below the EU average of 2,07%.  It is certainly strongly influenced by the country’s legacy of engineering excellence, commitment to public funding of research, and government policies promoting R&D spending by the private sector, such as tax policies. It is rather shocking that the Polish government spends essentially nothing on R&D and has very limited R&D-promoting tax policies.

Change of growth models

In a recent article, the Chief Economist of the EBRD argued that Central Europe must urgently transition from its traditional growth model based on cheap labour, imported technology, and cohesion funds, towards a new growth model based on innovation and entrepreneurship.

Judging by the data in the report, this is generally not happening. With the possible exception of Czech Republic, the V4 are stuck on the periphery of EU’s innovation ecosystem.

Given the generally grim innovation scenario in the V4, what can they do in order to jumpstart innovation and dramatically accelerate their progress towards greater competitiveness? It is evident that they must radically ramp up R&D spending, which will obviously present them with difficult political choices.

If they are able to muster enough long-term vision, the increase in R&D spending should be driven by government and universities, as the business sector might only gradually be induced to increase R&D spending.

The concrete solution being proposed herein would be for the V4 governments to swallow their nationalistic pride and undertake a joint effort to transform one of their leading universities into a “world-class research university” for the entire V4 region. No such ‘innovation-radiating’ academic institution currently exists in the V4 or in the entirety of Central Europe.

As such transformation would be anything but easy or inexpensive, going it alone would not be either an efficient or feasible strategy for anyone of the V4.  The selected university would be endowed with the mission of becoming an innovation hub for the region on the model of Stanford University in the US or Tsinghua University in China, as well as becoming one of the world’s top 100 research universities.

In order to carry out such an ambitious mission, world-class research faculty would have to be recruited, paid internationally competitive salaries and benefits, and provided with state of the art research laboratories.

Notwithstanding all of the challenges in such a project, the obvious candidate for the designation as “V4 world-class research university” is Charles University in Prague.

Charles University is already the top-ranked university in all of Central Europe (nr. 291 in the 2020 QS World University Rankings), without any close competitors in the region. It has an illustrious history and international reputation as a research university. It is located in a highly attractive city, with a proven track record in attracting top talent.

Although ultimately more than one V4 university should play such a role, Charles University is the best available academic platform for becoming the region’s first world-class innovation hub. History shows that such an institution can have profoundly transformative effects. Silicon Valley had been effectively developed by Stanford University (and the US Defense Department) years before the arrival of Steve Jobs and the personal computer.

Founder and CEO of Miszerak & Associates Sp. zoo, which specialises in advisory services to international private equity funds. In the 1990s he served as privatisation adviser to the Polish government and was heavily involved in the reform of the financial sector. Subsequently, he became CEO of one of Poland’s mass privatisation funds. He is also a regular contributor to the Financial Times and a Visiting Lecturer at the Renmin Business School in Beijing.

Eastern European Futures

In 2009, the European Union and six of its Eastern neighbours launched the Eastern Partnership (EaP) with the stated aim of building a common area of shared democracy, prosperity, stability and increased cooperation. A decade on, however, progress has been mixed.

Visegrad Insight is published by the Res Publica Foundation. This special edition has been prepared in cooperation with the German Marshall Fund of the United States and supported by the International Visegrad Fund.

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