Makó, Csaba Institute of Sociology Hungarian Academy of Sciences

1. New Growth Potentials for the SMEs: Stronger Involvement in the KIBS Economy) (The Case of theHungarian vs.Slovakian business service firms) Makó, Csaba Institute of Sociology Hungarian Academy of Sciences Group of Sociology of Organization and Work „Virtual campus for SMEs in a multicultural milieu”Final Erasmus Project Conference - BBS, Budapest, 22nd March 2010.

2. Agenda • Setting the Scene • - Six „Grand Challenges” facing Europe and the 2020 Agenda • - Asymetric (Unbalanced) Character of the Economic Development in CCE (Hungary) • 2.Looking for the New Trajectories of the Economic Development: Service Economy and the Critical Mass of Innovative Firms • - Historical shift in economic structure: from manufacturing to the service economy, and increasing role of organizational-social innovations) • 3.Source of Sustainable Competitivity of SMEs. Growing Role of Organizational Innovation/Learning in the KIBS sector. • - Lessons from the comparison of the Hungarian vs. Slovakian KIBS sector. (Comparing the diffusion of organizational innovation and the company knowledge development practice.) • 4. Lessons and Discussion

3. 1. Six „Grand Challenges” facing Europe(1) • 1. Economic growth – restarting economic growth and ensuring long-term sustainability and competitiveness for the future. (In 2009, GDP fell by roughly by 4 % for both EU and euro zone. All member states have been effected, albeit unevenly. The 2009 contraction ranges from roughly 2 % in France to 4.5 – 5.0 % in Germany, Italy and the UK.) • 2. Fighting unemployment – especially young unemployment and generational worklesness. (The current unemployment rate accross Europe is 9.8 %. Between 2008 and 2009, the highest increase were registered in Latvia (9.1 % to 20.9 %) and Lithuania (4.8 % to 13.8 %). The highest unemployment rate are in Latvia (20.9 %) and Spain (19.3 %). In October, the youth unemployment rate (under -25s was 20.6 % in the euro area and 20.7 % in the EU-27). Netherlands has the lowest rate of youth unemployment (7.2 %) and Spain (42.9 %) and Latvia (33.6 %) have the highest. • 3. Climate change – the Stern Review estimated that climate change could cost between 5 % and 15 % of global per-capita consumption.Average annual economic demages from 2000 to 2020 would be 18 trillion Euro.Major changes requried in the following fields: sources of energy, new infrastructures, working patterns, methods of production and distribution, new forms of interaction, behaviour and beliefs. • 4. Ageing population – by 2020, 25 % of the population will be over 60. (The 80+ population is expected to double before 2050. This will mean a ratio of 2:1 workers to retirees. This will lead to an increase of costs linked to pension, social security, health and long-term care by 4 – 8 % of GDP by 2025.)

4. 1. Six „Grand Challenges” facing Europe(2) 5.Social exclusion – due to ageing, poverty and/or cultural diversity. New solutions need to provide better access to services (health, care, housing and education) and opportunities for learnaing and employment. 6. Public sector innovation – growing social needs, togetehr with budgetary constraints, call for radically new and innovative public service methods. Challenges at the same time represent „opportunities” too (e.g. IT have created exciting possibilities for improving our ability to meet social needs, such as „e-health care”, „virtual school in education”, etc.) Several characteristics of the New Area of Innovation which differentiate future innovation from the innovation of industrial area. Four drivers which will change the way companies innovate: (1) Co-creating values with customers and tapping knowledge about users; (2) Global knowledge sourcing and collaborative networks; (3) Global challenges as a driver of innovation; (4) Public sector challenges as a driver of innovation.

5. 1. Asymmetric Character of the Economic Modernization in Hungary (3) Stylized facts of the industrial restructuring in the 1990s: • Great majority of the production facilities created in the country by the influx of FDI are representing „low-quality economic activities” on „The Quality Index of Economic Activities”. Key driver of FDI: cost instead of knowledge efficiency. (Washington consensus ideology and an outdated „techno-economic paradigm”) biased innovation policy orientation. (Kattel-Reinert-Suurna (2009). • Outcome: low innovation activity and unbalanced presence of „innovative-learning” work organization in Hungary. (International Comparison: European Working Conditions Survey- 2005). Source: www.eurofound.europa.eu, Valeyre et. al. (2009) Vezetéstudomány, (Management Science) October and November Issues, pp.2-15, and pp. 36-51.)

6. 1. Share of Models of Work Organization in EU-27: over or near to the EU average: EU-15 vs. NMS+2 (EWCS-2005) (4) (Közgazdasági Szemle, 2008)

7. 1.The Danish Example: Influence of company networking/ ownership on the organizational changes. A Danish example.(Nielsen, 2006) (5)

8. 2. Creating New Path of Economic Development in Hungary: The Growing Importance of the KIBS Sector.(6) Historical shift in the economic structure • Global trend: Increasing share of the service sector (especially the fast growing KIBS at the expense of agriculture and manufacturing) • In the current financial crisis and economic slow-down particular attention is paid to the economic activities having strong employment generating capacity. (EU -2020 Strategy on smart/green economy.9 • Hungary: between 1995-2006, the service sector generated 90 % of the new jobs and within the (very heterogenous service) sector, every second job (57 %) was created by the KIBS firms, where the great majority of firms belongs into the SME segment of the economy.

9. 2. Demand Side Perspective: The Share of the „IT” and „BPO” services. (Sako, 2009:7) and www.neoit.com) (7)

10. 2. Supply side perspective: Average Salaries in Selected Offshore Destination Countries. (Sako, 2009:5 and www.neoit.com) ) (8)

11. 2. Need for Critical Mass of the „Innovative/Learning” SMEs. Some features of innovation in the KIBS firms. (9) • 1. Importance of thehighly skilled employees in creating new services. • 2. Need to develop and maintain „knowledge management” (KM)systems to support new and innovative solutions. • 3. Central role of customers both in defining problems and develop efficient solutions in supplying services. • 4. Strong involement in the company network and developing strategic (or high value added) cooperation with the external knowledge sources. • 5. Increased role of the new managerial and organizational practices (organizational innovations). (Salter-Tether, 2006:17):

12. 3. An Example: Comparing the Hungarian vs. Slovak KIBS Sector. Structural Features of the Firms Surveyed in 2008/2009 (10)

13. 3. Distribution of structrual (radical) organisational innovations (11)

14. 3. Distribution of procedural (incremental)organisational innovations (12)

15. 3. Company Practice of Knowledge Development: „learning by acquisition” and „learning by participation” (13)

16. Some Lessons (14) • The fast emerging „service economy” in Hungary is opening a new growth potential for the Hungarian SMEs having „dynamic” capablity of innovation. • The sustainable competitiveness of the SMEs in the KIBS sector is strongly related to the collective (networking/clustering) learning capacity of the firms. The learning capacity anables the firms to produce higher value added (more knowledge content) products and services in the Value Chain in general and in the Global Value Chain (GVC) in particular. 3. Role of organizational and workplace innovations are increasing in the knowledge development and transfer. Technological innovation alone is not sufficient source of the sustainable competitivness of the SMEs. (e.g. Innovation Policy Workshop on „Social Innovation – Mobilizing Resources and People” – Bureau of Europe Policy Advisors, Brussels, 25th – 26th March, 2010.)

17. Some Lessons (15) 4. In renewing the National Innovation System in Hungary, there is a need to construct a „map” of innovative organization of the firms (by sectors, regions) to identify the innovative/learning segment of the SMEs. 5. Urgent need for Strategic” or „high-value added” partnership between business’, educational-research communities and the government („Triple-Helix model”) to design and implement the new trajectory of the economic modernization in Hungary.

18. Thank you very much! Contact: mako@socio.mta.hu Web: www.sow.hu