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09 May 2016

Regional Innovation Monitor Plus 2016Regional Innovation Report West Transdanubia (Industry 4.0 and smart systems)

To the European CommissionInternal Market, Industry, Entrepreneurship and SMEs Directorate-GeneralDirectorate F – Innovation and Advanced Manufacturing

Regional Innovation Monitor Plus 2016

Regional Innovation Report West Transdanubia (Industry 4.0 and smart systems)

technopolis |group| in cooperation with

Andrea Szalavetz

www.technopolis-group.com

Table of ContentsExecutive Summary 21. Advanced Manufacturing: Industry 4.0 and smart systems 5

1.1 Overview of performance and trends 51.2 Business sector perspective 61.3 Scientific research potential 91.4 Role of intermediary institutions 101.5 Developing skills for the future 121.6 Major investment projects 161.7 International cooperation 181.8 Policy support and delivery mechanisms 191.9 Good practice case 231.10 Leveraging the existing potential 26

2. Regional Innovation Performance Trends, Governance and Instruments30

2.1 Recent trends in innovation performance and identified challenges302.2 Institutional framework and set-up 332.3 Regional innovation policy mix 36

Higher Education and Industry Cooperation Centre ‒ Development of Research Infrastructure 37Support to companies’ RDI activities 37Development of prototypes, new products, technology and services 37Establishment of a consultancy & mentoring network to promote the internationalisation of ICT start-up firms 37

2.4 Appraisal of regional innovation policies 382.5 Policy good practice 402.6 Possible future orientations and opportunities 42

Appendix A Bibliography 44Appendix B Stakeholders consulted 46

Regional Innovation Monitor Plus 2016 i

PREFACEIn the context of the growth and investment package set out in the Investment Plan of the European Commission, the Regional Innovation Monitor Plus (RIM Plus) provides a unique platform for sharing knowledge and know-how on major innovation and industrial policy trends in in some 200 regions across EU20 Member States.Launched in 2010, the Regional Innovation Monitor aimed at supporting sharing of intelligence on innovation policies across EU regions. Building upon the experience gained and results obtained during the period 2010-2012, the RIM Plus 2013-2014 provided practical guidance to regions on how to use the collected information, via a network of regional experts. Since 2014, the RIM Plus has introduced a thematic focus on advanced manufacturing.The RIM Plus 2015-2016 evolved from a general monitoring of innovation policies towards establishing a more thematic focus in selected areas in order to contribute to improving the competitiveness of European regions.Particularly, the RIM Plus aims through its activities and in close cooperation with the regional stakeholders and other relevant initiatives to: Contribute to the development of new and open spaces of collaboration

and exchange on advanced manufacturing, each with a clearly defined thematic focus.

Play an enabling role in providing evidence-based information on specific themes and bring in outside perspective from other regions.

Map out regional practices in support of advanced manufacturing and relevant pilot/demo projects and work towards involving the relevant stakeholders.

Provide an easy access and comparative overview of regional innovation policies and relevant actions in the field of advanced manufacturing.

Share the lessons learned with the European Commission services to feed into the preparation of future programmes.

The main aim of 30 regional reports is to provide a description and analysis of developments in the area advanced manufacturing with a clearly defined thematic focus and regional innovation policy, taking into account the specific context of the region as well as general trends. All regional innovation reports are produced in a standardised way using a common methodological and conceptual framework, in order to allow for horizontal analysis, with a view to preparing the Final EU Regional Innovation Monitor Plus report.European Commission official responsible for the project is Alberto Licciardello ([email protected]).The present report was prepared by Andrea Szalavetz ([email protected]). The contents and views expressed in this report do not necessarily reflect the opinions or policies of the Regions, Member States or the European Commission.Copyright of the document belongs to the European Commission. Neither the European Commission, nor any person acting on its behalf, may be held responsible for the use to which information contained in this document may be put, or for any errors which, despite careful preparation and checking, may appear.Further information:

Regional Innovation Monitor Plus 2016 1

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Executive Summary1. Advanced Manufacturing: Industry 4.0 and smart systems Specialised in automotive, electronics, machinery and metal processing and casting industries, advanced manufacturing (AM) is highly relevant in West Transdanubia, for both technology users and producers.The results of this research show that not only flagship foreign-owned companies have implemented industry 4.0 solutions: high-performing domestic-owned companies have also made good progress towards the adoption of selected applications. The results also indicate that far more enterprises are engaged in advanced manufacturing related R&D than what the official R&D statistics suggests. Altogether, regional stakeholders in West Transdanubia are aware of the technological developments in their industries, and of the requirements these new developments mean for them.Stakeholders’ relative high awareness of and preparedness to industry 4.0 trends, challenges and opportunities are explained by (i) the demonstration effects of flagship MNC subsidiaries; (ii) the beneficial role Széchenyi University played in the region’s upgrading process; (iii) massive public funding of investments into universities’ research infrastructure and into the technology development of manufacturing enterprises.The main purpose of West Transdanubian companies’ investments in AM-solutions was operational excellence: solution of shop-floor technological problems and a general improvement of operation parameters, rather than simple cost reduction.West Transdanubia’s scientific research potential is aligned with its specialisation in advanced manufacturing. Key science centres (Széchenyi University, University of West Hungary) have benefitted from generous public support to build up research infrastructure comprising measuring and testing equipment that can be considered unique in Central Europe. Remaining challenges in terms of upgrading based on the West Transdanubia’s existing specialisation and endowments are as follows. Reduce disparities in adopting industry 4.0 solutions Although the largest intra-regional gap is manifest between technology adopters and non-adopters, there are substantial differences also across adopters. Despite a relatively good average performance with respect to the diffusion of industry 4.0 technologies, there are large intra-regional, and size- and ownership-related differences in this respect. Improve the return on investments in universities’ up-to-date

research infrastructureAlthough the establishment of new laboratories has enhanced industry–university collaboration; and has had beneficial impact on practice-based

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higher education, while ensuring non-negligible income to universities, return on investments shows large disparities across universities and equipment items. A systematic business model needs to be elaborated by each university, to ensure fair return on public investment in research infrastructure. Increase the number of available qualified employees through

expanding and upgrading industry 4.0-related higher educationInterviewed executives were unanimous in claiming that the most important barrier of their local expansion and upgrading is the lack of qualified employees. Although non-negligible improvement has been achieved in West Transdanubia in this respect, demand for skills has been growing at an even higher pace. In the ‘second machine age’, despite all upgrading, industry 4.0-related higher education in West Transdanubia (and in Hungary) seems to fall behind in ‘the race between education and technology’. 2. Regional Innovation Performance Trends, Governance and InstrumentsAmong the Hungarian convergence regions, West Transdanubia features the most spectacular development in terms of innovation performance, albeit starting from a low basis in the mid-2000s. WT used to rank last among Hungarian regions in terms of all major innovation indicators. Due to a massive public funding of business enterprises’ investments in technology development and innovation, mainly from EU Structural Funds, and to the upgrading of MNC subsidiaries in the region, which was accompanied by investment in local subsidiaries’ process and product development capabilities, innovation indicators increased rapidly and spectacularly since the mid-2000s. This trend was non-abated during and after the global crisis. However, within West Transdanubia, there have always been considerable intra-regional disparities in terms of economic actors’ development level and innovation potential. Developmental interventions have improved the region’s performance indicators, but, at the same time, intra-regional disparities have further increased.Despite spectacular improvement, the region’s innovation performance still lags behind the EU average and is also inferior to the Hungarian average, in a number of respects. Challenges can be summarised as follows. Promote technology-based entrepreneurship and local technology

providers’ integration in the value chains of MNCs’ local subsidiaries. Promote regional actors’ participation in European research and

technology collaboration projects. Improve the measurement and the reporting of innovation activities

and consider also non-R&D-based innovation activities as innovation.With regard to innovation governance, the transformation that started in the early 2010s was completed. The era of regionalism is over in Hungary: NUTS2 regions are simple statistical units, and regionalism exists only as a façade exercise. Regional institutions had been dissolved or hollowed out: regional stakeholders are marginalised. Policy implementation is centralised: coordinated and administered by national level organisations. Nevertheless, innovation support measures are broadly formulated to allow for regional specifics to be taken into account. Regional stakeholders


are expected to prepare project applications that are aligned with the region’s endowments.3. Future Actions and OpportunitiesWith regard to Industry 4.0 and smart systems Exploring new collaboration opportunities by improving regional

stakeholders’ participation in EU-level research programmes, platforms, and multi-region initiatives

Currently, West Transdanubian stakeholders do not participate in EU-level and multi-region programmes, platforms and initiatives that promote industry 4.0-related technology adoption. Most of them are not even aware of these initiatives. Increased SMEs’ awareness of these programmes and initiatives and, in particular, of good practice cases would intensify the diffusion of these technologies. Launching a ‘manufacturing extension programme’ similar to the

agricultural extension programmes adopted in the U.S. following World War II, and later, also in a number of developing economies. In a similar vein, ‘manufacturing extension’ could contribute to SMEs’ awareness increase of industry 4.0 technologies, and it would help them getting started with initial applications.

Drafting and implementing a regional industry 4.0 initiative and introducing regionally decentralised dedicated support instruments

In addition to launching a coherent national industry 4.0 strategy, regional-level strategies need to be drafted, complemented with dedicated funding and implemented in a regionally decentralised manner. Well-designed and well-communicated regionally-tailored industry 4.0 initiatives will not only increase stakeholders’ awareness but will also prove a strong incentive for private investment.With regard to innovation policy Promoting SMEs’ integration in MNC subsidiaries’ value chains

as suppliersMost SMEs find it very difficult to meet the tangible and intangible requirements of flagship MNCs’ local subsidiaries that are necessary to become their suppliers. SMEs’ support in this respect promises good return, since these MNC subsidiaries are the key drivers of regional industrial upgrading. Providing support to supplier integration programmes, or to collaborative innovation undertakings between supplier firms and their integrator companies is an opportunity to enhance industrial upgrading. Promoting SMEs’ internationalisation Internationalisation is found to be closely associated with companies’ above-the-average growth and productivity performance, and with above-the-average innovation potential. This is recognised by Hungary’s national level strategy, since one explicit purpose of the Economic Development and Innovation Operational Programme is to increase the share of export-oriented SMEs, and to improve SMEs’ competences and enable them to enter international markets. This is an especially relevant opportunity for West Transdanubian companies that have managed to become suppliers of MNCs’ local subsidiaries and have thus moved ahead along a complex development trajectory.


Promoting knowledge-intensive business services providersThe role of regional (private) knowledge-intensive services providers (engineering firms, contract research and technology solutions providers) is very important in West Transdanubia, since they contribute both to the reinforcement of intra-regional business linkages and to knowledge-driven regional development. Moreover, industry 4.0 solutions providers (among them industrial automation firms and research and technology development services providers) can more easily be plugged into local MNC subsidiaries’ value chains than component suppliers. Setting up dedicated measures that foster these firms’ collaboration with the region’s manufacturing enterprises is therefore regarded as a promising opportunity enabling the increase of both the region’s value added to sales ratio and the value capture of the region’s enterprises.


1. Advanced Manufacturing: Industry 4.0 and smart systems

1.1 Overview of performance and trendsWest Transdanubia (WT) is a developed, industrialised region at Hungary’s western border: the only region beside Central Hungary, where GDP per capita is above the national average (104.7% in 2014) – nevertheless it is only 67% of EU28 average (Eurostat).The region experienced rapid, FDI-driven growth after the change of the regime, and also currently, the key driver of regional growth is the export-oriented production of foreign subsidiaries. Although the region’s share in total FDI stock diminished from 20.45% in 2011, to 17.6% by 2014, it still ranks second after Central Hungary with respect to FDI-attraction potential. FDI reinforced the region’s specialisation in mature manufacturing industries: automotive, electronics and machinery & equipment. WT’s industrial production per capita is the highest in Hungary: double of the national average (2014). The region accounted for 19% of Hungary’s total industrial production in 2014. Manufacturing accounted for 95.2% of WT’s industrial output (2013), with a production value of €11.19b (Source: EURegion, 2015). Manufacturing employment was 30.3% of total employment in 2014 (Source: EURegion, 2015).The industry WT is most specialised in is automotive. Data on the performance of the automotive sector exist only for the national level: this industry has been the main engine of Hungary’s economic growth for several years since the global crisis. In 2015, the value of total automotive output was €25.3m (Source: data published by the Hungarian Investment Promotion Agency). Total automotive employment was >149k. The industry accounted for 21.6% of total manufacturing export. Although WT’s share in total automotive production declined since the early 2010s, which is mainly due to greenfield investments in other regions, nevertheless WT still features a high concentration of automotive industry. Consequently, the 2008-2010 crisis hit West Transdanubia particularly hard: the number of jobs decreased by nearly 7% between 2007 and 2010. Since then, growth resumed and employment increased (unemployment is much lower than the national average: 4.6% in 2014). Figure 1


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Industrial output in West Transdanubia (€b, current prices)

Source: Central Statistical OfficeWT’s manufacturing actors are deeply integrated in global value chains, either as local subsidiaries: export-oriented manufacturing facilities of multinational corporations (MNCs) whose sales channel is dominantly intra-firm, or foreign- or domestic-owned suppliers of the first group (of MNCs’ export-oriented local subsidiaries). Suppliers operate in the machinery, electronics, plastic and metal processing & casting industries. WT is a moderate innovator region: most of its innovation performance indicators are 50 to 90% of the EU-average. While regional GERD increased by 30% since 2010, still, its GDP share accounted for only half of the national average in 2014 (the share of regional GERD in regional GDP was 0.65%, while the national average was 1.37%). In the business sector, improvement in innovation performance was partly due to public support programmes and partly to the strengthening of corporate actors’ investments in process innovation (technology development) and, to a lesser extent, in product innovation.Anecdotal evidence (case studies, newspaper articles, and documents published at corporate websites) suggests that business R&D investment has considerably increased over the past couple of years. Indeed, the research carried out in the framework of this assignment suggests that beneficial trends in innovation performance are partly driven by companies’ investments in the implementation of industry 4.0 solutions, and in related research.The results of the interviews also indicate that high-performing local manufacturing actors (not only MNC subsidiaries but also domestic-owned SMEs) are aware of the opportunities the new, disruptive manufacturing technologies present for them. This awareness and actors’ timely responses to the challenges of the new trends can be explained by three factors. The first one is their high level of integration in global value chains, which implies demanding customers (cf. Porter, 1990). The requirements regional manufacturing actors have to meet in terms of process parameters, accuracy, costs, lead time and quality, can be met only through the adoption of new technologies and industry 4.0 solutions.


The second explanatory factor is the strong host-region environment: WT’s companies operate in a well-established industrial cluster, characterised by a large number of representatives of supporting industries including both manufacturing firms in related sectors and knowledge-intensive business services providers (ICT firms, engineering and rapid-prototyping services providers, etc.), and by the presence of science centres with up-to-date research infrastructure.Thirdly, it needs to be emphasised that local subsidiaries are not passive recipients of parent companies’ resources and implementers of their strategic imperatives. Both secondary information sources (e.g. past case studies) and interview results indicate that the proactive behaviour and initiative-taking of local subsidiaries account for the rapid diffusion of industry 4.0 solutions, and for their gradual turning into (a) pilot plants of modern work practices and smart production processes and (b) centres of excellence of process-related research.

1.2 Business sector perspective West Transdanubia is a prime example (at a regional level) of a ‘factory economy’ (cf. Baldwin, 2012 about ‘headquarter economies’ and ‘factory economies’): its modernisation, productivity growth and economic dynamism depend on the activities of foreign investors. Specialised in manufacturing in general, and in automotive, electronics and machinery industries in particular, foreign-owned companies’ production is export-oriented. In some cases the sales channel is intra-firm, in others, the Hungarian subsidiary delivers its products directly to the customers. Obviously, business development and sales is centrally managed in these latter cases as well. The majority of flagship companies in the region are tier 2 suppliers (e.g. Luk Savaria: clutches, clutch discs; Nemak Győr: aluminium cylinder heads and engine blocks, Delphi Hungary: electronic valves, tubes and other electronic components, Dana Hungary: engine components), but there are prime examples of original equipment manufacturers (OEM)1 and tier 1 suppliers supplying complex products and systems (Audi Hungária and Opel Szentgotthárd Ltd.: both companies manufacture engines; SMR Automotive: rearview mirrors and blinkers; Delphi Hungary: engine control units and modules, ThyssenKrupp Presta: assembles corner modules and rear axles for Audi). Industry 4.0 is highly relevant in the region, for both technology users and producers. On one hand, there are several representatives of industry 4.0 technology suppliers in the region, such as

IGM Robotic System Ltd., the local subsidiary of the Austrian manufacturer of robotic solutions (automated welding and cutting; flexible production lines and systems);

Tipa Hungary (customised machines with control units, automatic optical inspection systems and database management solutions);

Jankovits Hidraulika Ltd. (industrial automation and control, engineering solutions);

Sick Ltd. (sensors, electronic components); HNS Technical Development Ltd. (hardware and software solutions

for process data collection); Technology Centre (Technológia Centrum): an engineering and

technology services provider.


On the other hand, industry 4.0 technology users are often technology producers themselves. Some companies apply self-designed and self-manufactured robots and other self-developed, custom-made automation solutions in their production processes, and/or develop the related software, and/or participate in the development and the testing of selected measurement and testing equipment to be applied in the production process.A prominent example is iQor Global Services Hungary. Specialised in electronic repair and warranty services, engineers at iQor’s Hungarian subsidiary have developed multiple automation solutions making device diagnostics, product screening and testing computer-controlled and automated. Both at iQor and at Delphi Hungary, local engineers are engaged in test equipment design and manufacture and in related software development. The performance indicators of the region are highly concentrated: the TOP 10 automotive and electronics companies accounted for 22.3% of total regional turnover in 2014. This is mainly due to the performance of the top company: Audi Hungária that alone, accounted for 16.4% of total turnover. These 10 companies (Audi, LUK Savaria, Delphi Hungary, SMR Automotive, BPW Hungária, Epcos, Dana Hungary, Nemak Győr, Opel Szentgotthárd, BOS Automotive Products Magyarország) are all MNCs’ local subsidiaries. At the regional level, foreign equity accounted for 40% of total equity (in 2014), and the share of manufacturing in companies’ total equity capital was also 40%.2

Consequently, the development perspectives of the region’s top stakeholders depend on their MNC-owners’ strategic decisions. The development of these companies showcases the theoretical thesis (Birkinshaw and Hood, 1998) that even without any formal changes in their mandates, local subsidiaries evolve over time: they reinforce their existing capabilities, assimilate and master their parent companies’ persistent tangible and intangible investments, in brief they accumulate resources and develop related capabilities. Nevertheless, the cases of both the domestic- and the foreign-owned companies surveyed in the framework of this assignment also demonstrate that initiative-taking, strategy development, learning and profit reinvestment are all indispensable for the continuous improvement of operational capabilities.Subsidiary development, and also the development of the surveyed high-performing domestic-owned companies3 was strongly related to the integration of industry 4.0 solutions in the production process, that, in turn, allowed for product upgrading as well.The corporate interviews indicate that the primary purpose of investments by the surveyed companies in advanced manufacturing solutions was not cost reduction, but rather operational excellence. Process innovations were achieved as an outcome of in-house development efforts, and/or RTDI activities carried out in collaboration with science centres or engineering services providers. Process innovations addressed shop-floor technological problems or were aimed at a broad-based improvement of operation parameters.Examples of shop-floor technological problems at the surveyed companies included tool wear and degradation, surface residual stress, excessive surface roughness, inefficient process scheduling, excessive downtime, long cycle times, long changeover time, high machining costs. Solutions of these common, albeit firm-specific problems were par excellence industry 4.0 related, relying on


advanced computing techniques (e.g. modelling the machining operations and analysing parameters that are directly related to tool wear);

advanced sensor and IoT (Internet of Things) techniques (e.g. the embedding of a monitoring and detection system in the production process that can predict the course of the process and prevent negative outcomes), and/or

sophisticated measurement and testing equipment; application of artificial intelligence techniques (e.g. machine

learning) in the production process.The other objective of investments in industry 4.0 and other advanced manufacturing technologies was a general improvement of operation parameters. Firms tried to capture and analyse process related information to support operations, evaluate performance and identify weak points and bottlenecks in the system. As detailed during the interviews that provided insights into firms’ motivations to invest in industry 4.0 solutions, the surveyed companies tried to achieve

Process optimisation, reduction of throughput time, reduction of interim storage;

Improvement of production scheduling; Enhanced process visibility (process control); Improvement of capacity control and optimisation of human

resources allocation (assignment of the operators to the assembly tasks);

Improvement of the flexibility of production lines; Reduction of the time requirement of product changeovers (in the

case of high product variety, when frequent changes are required in the products manufactured by a given company);

Automation of selected processes through the integration of robotic solutions, in order to improve the accuracy and the quality of the tasks (e.g. of milling, turning, drilling, grinding), or to allow for handling large, heavy or cumbersome parts;

Improvement of supply chain planning.This list suggests that regional stakeholders, whether subsidiaries of well-known MNCs or stand-alone, domestic-owned companies participate in global competition with the purpose of becoming leaders / sustaining leadership in their fields. For that sake, they implement non-abating investments in the improvement of the business functions they undertake, no matter whether their assignments are confined to operations or include a more complex portfolio of business functions. Even in the cases when local assignment is confined to operations, process upgrading related development tasks have necessitated a non-negligible upgrading of subsidiary-level engineering capabilities. Investments in advanced manufacturing have, in turn, opened up opportunities for endogenous innovation and for establishing linkages with domestic/regional science centres.

1.3 Scientific research potentialWest Transdanubia’s scientific research potential and, in particular, the activities of its science centres are aligned with its specialisation in


advanced manufacturing. Széchenyi University is the key public scientific research centre. Széchenyi University has developed its research potential (research infrastructure and intangible capabilities) in collaboration with some of the major manufacturing companies in the region. Due to large-scale public support programmes, the university has kept investing in the extension and upgrading of its research infrastructure. Some pieces of its research infrastructure are unique in Central Europe (see later).The main areas of Széchenyi University’s scientific research competence that are at the same time the main technology areas of West Transdanubia, include, but are not limited to

applied mechanics (e.g. solving problems in engineering statics, dynamics, vibration and thermodynamics; development of modelling and experimental methods of mechanics of fibre-reinforced composite materials; numerical analysis of mechanical and thermodynamic behaviour of viscoelastic materials

development of internal combustion engines (e.g. optimisation of mechanical systems of internal combustion engines; tribology-related research);

vehicle engineering (e.g. technology optimisation through computational simulations and advanced optimisation methodologies; fuel efficiency (energy management) related research; vehicle acoustics related research);

vehicle manufacturing (e.g. process simulation, technology development, measurement, testing);

materials science (e.g. properties of metallic alloys, nano-structured materials, polymer composites, polymer nano-composites, metal-ceramics composites; laser technology of powder coating with powder metals, properties of powder coated technologies;

automation: (e.g. research and development of programmable logical controllers (PLCs); electromagnetic field calculation; design of delay-insensitive logical circuits; research of cooperation and communication of robots based on computational intelligence; R&D of energy storage and recuperation systems, fuzzy model identification and evolutionary algorithms, architecture of embedded systems, numerical analysis of electromagnetic fields);

information technology (e.g. verification and validation of safety-critical computer systems, development of electric and hybrid vehicles, development of decision supporting methods, robotics);

mechatronics and machine design (e.g. research on digitally controlled dynamic systems, development of optical sensors);

mathematics and computational sciences (e.g. finite element methods, computational fluid dynamics and their utilization for industrial purposes, theory and application of operations research; optimisation of production systems, data mining, high performance computing).

Besides Széchenyi University’s research centres and laboratories, the research departments of the flagship companies in the region constitute another important component of the region’s industry 4.0-related scientific research potential. In 2012 there were 239 research centres (in all disciplines) in West Transdanubia, while the number of corporate centres was 114. One example is the Rába Development Institute, established in 2010, specialised in firm-specific new product development, development of the manufacturing system, and in various measurement and testing tasks. The number of employees at Rába Development Institute was 40 in


2015, including a CAD group, and engineering teams specialised in oil management mechatronics, structural analysis, finite element modelling and driveline development.

There are additional, relatively smaller research laboratories at the University of West Hungary (the Faculty of Natural Sciences and the Faculty of Wood Sciences are to some extent related to industry 4.0). A new actor that is bound to add to the region’s scientific research potential is the Automotive Industry Centre of Excellence (J3K) at the premises of Széchenyi University. J3K was established in 2015 by the Institute for Computer Science and Control of the Hungarian Academy of Sciences (SZTAKI), Audi Hungária and the University. J3K will be specialised in (i) computing and control technologies, (ii) mathematical modelling and (iii) materials science.When asked about R&D collaboration with Hungarian science centres, the surveyed key regional actors confirmed that they do not rely exclusively on the scientific research potential of West Transdanubia. This is self-evident, since the R&D efforts of most manufacturing industries, and in particular those of the automotive industry, are increasingly interdisciplinary. Consequently the key manufacturing actors of the West Transdanubian region have established close collaboration also with science centres outside the region, among others with Pannon University in Central Transdanubia; SZTAKI (Budapest); the University of Miskolc (North Hungary); Bay Zoltán Nonprofit Ltd. for Applied Research (Miskolc and Budapest); the University of Óbuda (Budapest); and with the Budapest University of Technology and Economics.

1.4 Role of intermediary institutionsExamples of innovation intermediary institutions operating with the purpose of enabling regional and sectoral innovation and enhancing innovation capacity abound in West Transdanubia. All textbook types of intermediaries are represented, including

The regional innovation agency: Pannon Novum RIA; regional industry associations4 (e.g. West Pannon Centre for

Automotive Industry and Mechatronics); clusters (Professio Metalworking Cluster; Pannon Mechatronics

Cluster; Pannon Wood and Furniture Cluster); chambers of industry and commerce (in each county of the region); NGOs (e.g. Pannon Development Foundation); enterprise agencies (e.g. Kisalföld Enterprise Promotion Agency;

the Enterprise Promotion Agency of Zala County); science and technology centres (e.g. INNONET Centre of

Innovation and Technology); business parks (the industrial park of Győr is a prominent

example). (Altogether there are 30 industrial parks in the region, but only few of them are efficiently managed);

business incubators (e.g. in Zalaegerszeg at the premises of Technológiai Centrum);

technology transfer offices (e.g. the technology transfer office of the University of West Hungary).


However, the activities of the majority of these intermediary institutions are not directly related to the diffusion of industry 4.0 technologies, and have therefore little direct impact on the uptake of advanced manufacturing technologies by SMEs in the region. Estimating the impact of intermediary organisations is a much-researched, complex issue (see review and a proposed methodology by Dalziel and Parjanen, 2012). According to these authors, the factors to be considered for a proper impact assessment are as follows. (a) Purpose of the given intermediary institution; (b) Inputs (e.g. knowledgeable people, relationship, equipment, funding, etc.); (c) Outputs (e.g. enhanced scientific and business knowledge, new

equipment and facilities; upgraded technology; new activities such as design, testing, prototyping; scale-up of activities; new applications; new intellectual property; intermediary-institution-activity related output, such as events, conferences seminars; technology transfer actions, such as patents, licensing agreements, access to financing and so forth);

(d) Impact (e.g. new business or scientific linkages; new products; increased revenues, employment and/or profit; new markets; increased market share; increased investment; increased firm-level competitiveness; and long-term social, economic and environment impacts).

Applying this framework to the activities of the intermediary institutions in West Transdanubia, the first deficiency is that of purpose: industry 4.0 related formal objectives have not been integrated in the strategies of these institutions (most of them do not have any formal medium-term strategy). Industry 4.0 topics occasionally emerge in the agendas of the events organised by these intermediaries, and this topic comes up also in their newsletters (that provide information about key domestic or international innovation results). This contributes to the increase of regional stakeholders’ awareness of industry 4.0 trends and novelties: a necessary, but insufficient condition of the diffusion of R&D results.The inputs of the majority of these institutions are more or less in line with the textbook type inputs, provided by intermediary institutions to their clients/members. The main role of these institutions is provision of networking services and business information; organisation of events (brokerage events, trade shows, business forums and seminars), and interest representation. Due to the funding allocated to these intermediaries in the framework of public support programmes, some of these intermediaries (e.g. incubators, science centres) possess up-to-date measurement and testing equipment and other research infrastructure-type equipment items. One input component is however missing: the listed intermediaries are not engaged in the funding of regional stakeholders. Funding is completely centralised in Hungary. Assessing the output (the diffusion of industry 4.0 technologies and their uptake in the region), as it was detailed in the previous sections and will further be elaborated in the subsequent sections, there are salient examples of enhanced scientific activities, investment in new equipment and in technology upgrading; new and scaled-up activities and new intellectual property. However, this output (the improvement in the resources and the capabilities of intermediary institutions’ clients and/or members) cannot be attributed to the activities of the region’s intermediary organisations (except for some directly business related institutions, as detailed below). Beneficial developments are the outcome


of the companies’ strategic actions. At MNC subsidiaries, industry 4.0-specific development is headquarters-driven and/or driven by subsidiaries’ initiative-taking and demonstrated capabilities. At domestic-owned companies, development is driven by these companies’ strategic actions and competence accumulation. The other explanatory factors behind the reviewed beneficial developments are industry–university collaborations and, last but not least, funding provided in the framework of national-level public support programmes. Altogether, the role of intermediary organisations is marginal.The conclusion is similar when item (d) of the above list: ‘impact’ is considered. There are abundant examples of industry 4.0-related positive phenomena, such as new products, improved process efficiency, reduced costs, increased investment, increased firm-level competitiveness. However, these developments cannot be attributed to intermediary institutions’ activities: they are the result of the surveyed companies’ strategic actions. Enhanced scientific linkages and, to some extent, intensifying intra-regional business linkages are the only exceptions that can be associated with the inputs and activities of selected intermediary organisations. Indeed, the surveyed companies have considerably enhanced their linkages with higher education institutions and science centres.These caveats notwithstanding, the subsequent paragraphs will provide some details about selected intermediary organisations. The industrial park of Győr is one of the region’s success stories, dating back to the massive inflow of foreign investors in the 1990s and 2000s. There are currently about 100 manufacturing companies settled in the park, with altogether 6,000 employees and a total investment of €533m. In line with its expansion, the park’s management has developed and upgraded its services. One of the oft-proclaimed current objectives of the park’s management is to enhance the collaboration of the companies within the industrial park.Example of a successful science and technology centre is INNONET, established in 1997. INNONET is a technological competence centre that provides technology services (e.g. rapid prototyping), and management and business incubation services to the region’s SMEs.Example of a successful cluster is Professio Metalworking Cluster. Its members include some of the surveyed companies, specialised in metal processing and casting, manufacturing of customised industrial equipment and industrial automation solutions. Cluster members are suppliers of some of the surveyed flagship companies in the region, and obviously of other companies (mainly MNCs in Hungary and abroad). Besides information sharing and networking, the main purpose of cluster members’ collaboration is to enhance the quality of dual education in the region, to raise awareness of the importance of up-to-date vocational training and engineering education.

1.5 Developing skills for the futureOne of the major issues with regard to the future development of the region in general, and of regional advanced manufacturing, in particular, is the poor availability of advanced-manufacturing-related knowledge and skills. In an industry environment that combines physical and virtual reality, there is an increasingly pressing shortage of both workforce with general operations skills and of engineers with up-to-date engineering knowledge.


In an industry 4.0 environment, where robots are no longer locked in work cells, employees need to learn about and master interactions with the production system through new kinds of user interfaces (not only the direct mechanical and electrical controls, but tablet PC or smartphone interfaces, smart glasses, etc.). They are expected to be familiar with the signals provided by cyber-physical systems. In brief, workers are expected to possess (among others) interface competences, that is, be able to work with systems that include communication and sensing technologies and sophisticated computer controls. In a shop-floor environment, where the value of industrial equipment amounts to € millions and the faults in the operation of the systems could cause huge damages, where changes and disturbances need to be managed on a continuous basis, and where even shop-floor workers often need to take decisions themselves, employees need relatively long time to get acquainted with the with the standard practices and the company-specific production systems (that comprise highly customised units and specifically designed manufacturing cells). Engineers are expected to have systems competences: have a deep understanding of the production system (how individual parts of the systems are related to each other and to the system as a whole), and understand the tools and techniques to test and maintain the production system. Moreover, engineers need to combine basic engineering and system engineering knowledge with advanced computing knowledge.Similarly to other regions, both within Hungary and in advanced economies all over the world, skill shortage is the main barrier ahead the expansion and the quality-based upgrading of companies in West Transdanubia.A number of public support programmes and bottom-up industry-university collaboration projects have tried to address this problem, and align future employees’ skills with the companies’ professional and vocational needs. In tertiary technical education, for example, it was recognised long ago that ‘chalk and talk’-type education provided in theory-oriented, lecture-centric courses, is obsolete. However, fulfilling the objective that engineering education keeps pace with the rapid technological changes that characterise this discipline, requires massive investments by both industry representatives and universities. As detailed below, universities have done their do, by investing in modern laboratory equipment. Teaching ‘theory-grounded practice’, however, cannot be confined to the integration of high-quality laboratory work in the curricula.Above and beyond universities’ tangible investments in laboratory equipment, the solution of the problem of skill shortage was the introduction of dual-type practice-oriented education. The pioneering initiative of the Practing Foundation of Széchenyi University, started 20 years ago, in the mid-1990s. Funded originally by the PHARE Programme, the Practing initiative soon became an extended, well-functioning network comprising more than 200 stakeholders (companies and higher education institutions). The Practing programme became the basis of the present dual education system that is similar to the German system. Dual education is provided to both vocational school students and to university students. Large companies, e.g. Opel Szentgotthárd and Audi Hungária in Győr have established special training centres5 where vocational school students gain work-based practical experience and participate in formal courses. Other companies have introduced standard shop-floor practices of vocational training.


University students also spend part of their education at companies to receive work-based, practical education (shop-floor competence development). For example, university students spending their practice time at Audi, learn how to programme, operate and maintain robots and CNC metal-cutting machines. Besides basic engineering skills, training courses also address other skills, such as management, team building, project management and foreign languages. In order to implement an effective, standard training programme, training providers needed to be trained first. In Audi Hungária, German experts provided courses to would-be trainers and conveyed Audi’s new teaching methods.In the framework of dual training, students prepare their theses with the help of company mentors. Companies pay student allowances, provide infrastructure, make students acquainted with company-specific work environment, announce topics for student theses that target real-life technological problems, and provide supervisors for students. Furthermore, companies become engaged in university curriculum development, and organise research and technology development competitions. A salient example of this latter initiative is the annual Techtogether competition6 for engineering students specialised in automotive technologies, where students (university teams) present their development results. The first results of switching to practice-oriented technical education are gradually becoming manifested.The subsequent paragraphs provide some examples of each component of the transformation of industry 4.0-related higher education: of (a) universities’ tangible investments in modern laboratory equipment, (b) industry-university collaboration in practice-oriented higher education, and (c) the related public support measures.Universities’ tangible investments in advanced manufacturing technologies, financed partly from the public support measures detailed later, and partly by companies within and outside the region7, allow for both profit-oriented services provision and for embedding high-quality laboratory practice in engineering education. Coupled with university researchers’ systematic knowledge accumulation and networking with the region’s manufacturing stakeholders, this infrastructure has contributed to turning Széchenyi University into an advanced manufacturing-related knowledge hub, and to the strengthening of its third mission besides education and research: entrepreneurship (cf. Etzkowitz et al. 2000). A prominent example of universities’ investments is the Materials Testing Laboratory of Széchenyi University in Győr. Recent investments in laboratory equipment include equipment for (a) 3D shape reconstruction, (b) laser scanning, (c) measurement of surface roughness, (d) microstructure investigation. Examples of other high-value, industry-specific equipment purchased by the University are scanning electron microscope, vibration test chamber, thermal shock chamber, rapid prototyping equipment, hardware and software for process simulation and analysis, process planning etc. Examples of high value research infrastructure at the Audi Department of Internal Combustion Engines include a dynamometer, capable of testing gasoline and diesel engines; a cold test dynamometer for friction loss measurement; a radionuclide wear measurement system, which makes high-accuracy and fast online measurement of wear in internal combustion engine possible; tribotest equipment, supporting research on wear and friction of the material of contacting components; electronic microscopes; particle image velocimetry equipment for the analysis and optimization of the flow


processes in the engine; a thermal camera for the examination of the distribution of surface temperature.The University of West Hungary, in particular the Simonyi Károly Faculty of Engineering Wood Sciences and Applied Art has also implemented considerable investment in laboratory technology, which allowed it to become a contract research services centre. Apart from being a competence centre in wood sciences and in addition to investing in the related technological (measurement and testing) infrastructure, there are some 80 laboratories in the Natural Resources Research Centre, equipped with research infrastructure related to research on wood and paper manufacturing, energetics, robotics, polymer technology, and nanotechnology.Overall, this list illustrates that huge investments have been implemented in universities’ advanced-manufacturing-related laboratory equipment, which obviously contributed to the development of related research competences. The descriptions of universities’ projects indicate that up-to-date research infrastructure is used by MNC subsidiaries in the region and by selected regional SMEs. However, this unique research infrastructure has not facilitated universities’ integration in large-scale international research projects, such as H2020.Another advanced-manufacturing-related example of tangible and intangible investment used for developing skills for the future, is Széchenyi University’s collaborative virtual reality platform, developed by the Institute for Computer Science and Control of the Hungarian Academy of Sciences, and used in technical education. Even without physical access to robots and CNC machines, training can be performed in an augmented virtual environment, where robots, fixtures, machine tools and work pieces are virtualised, and real-life situations simulated (Galambos et al., 2015). This platform is used also by companies to train new employees (using a mixture of real and virtual machines). As for industry-university collaboration, the dual education scheme was gradually adopted by an increasing number of companies in the region and has become widespread and standardised. In addition to the flagship automotive and electronics companies in the region, e.g. BPW Hungária, EPCOS, Opel Szentgotthárd, Rába, Delphi Hungary, iQor, Luk Savaria, more than a hundred of other firms (both foreign and domestic-owned ones) provide practical placements to students of the region’s higher education institutions. The two key universities (Széchenyi University and University of West Hungary) have established partnerships also with firms outside the West Transdanubian region, even with companies operating in the neighbouring countries. Above and beyond this traditional form of industry-university collaboration, a more diversified, flagship example of industry-university collaboration is the one between Audi Hungária and Széchenyi University in Győr. Over the past decade, Audi gradually expanded its collaboration with Széchenyi University, involving more and more university departments: in addition to the Department of Internal Combustion Engines, the Department of Vehicle Manufacturing and the Department of Vehicle Development, it soon became engaged with the Department of Material Science and Technology, the Department of Environmental Engineering and the Department of Logistics and Forwarding. To make collaboration increasingly institutionalised, the company established its own faculty at Széchenyi University: the ‘Audi Hungária Faculty for Automotive Technology’. This faculty now has six Audi professorships (full-time Audi-employees are part-time professors at Széchenyi University), in


disciplines, such as internal combustion engines, automotive manufacturing technology, complete vehicle development, material science and technology, environmental engineering, logistics and shipping, and leadership and organisation communication.Furthermore, the two parties are engaged in a number of joint research projects, e.g. in the field of engine mechanics and tribology. Research tasks include

modelling, e.g. mechanical losses of internal combustion engines; development of measurement procedures related to of internal

combustion engines; simulation and experimental analysis, e.g. of wear behaviour of

combustion engine components; V-8 engine block stress analysis; tribology of engines, crack process analysis of connecting rods;

analysis of heat transfer; modelling, simulation, and experimental analysis of friction and

lubrication phenomena related to internal combustion engines; optimization of production processes, e.g. surface technology

related processes); development of alternative automotive drives systems.

This list demonstrates that (except for the last item, implying product development) joint research projects target advanced manufacturing, that is, advanced process solutions.A recent example of industry-university collaboration is the agreement signed between Huawei Technologies and Széchenyi University in Győr. In a five-year collaboration agreement (starting in 2016), Huawei grants €330k to Széchenyi University for laboratory development, and curriculum development in the field of information and communication technologies. Huawei will also share its own e-learning material with the University.Alongside dual vocational training and university students’ dual education, a West Transdanubian company announced advanced-manufacturing-specific PhD programmes. Rába Automotive Holding Plc. launched PhD programmes in the field of oil management mechatronics and gear cutting. PhD students enrolled in this programme will be employed in Rába’s Development Institute.Examples of public support programmes related to the development of skills of the future include the Social Renewal Operational Programme (SROP) and the Social Infrastructure Operational Programme (SIOP) of the New Széchenyi Plan. Support measures targeting the development of higher education and related research capacity include

SROP: ‘Support to regional and sectoral collaboration in order to promote industry-university projects of higher education institutions’. In the framework of this measure €2.5m grant was allocated to a consortium of higher education institutions coordinated by the University of West Hungary in 2013. The grant was used for investment in research infrastructure, collaboration in the field of mechatronics and related higher education. The University of West Hungary was beneficiary of another grant aiming at the development of its dual education system (€1.2m in 2015). €5m was granted to Széchenyi University Győr, for similar


purposes (support to regional and sectoral collaboration), used for investment in the upgrading of automotive industry related laboratory equipment. The Vehicle Development Centre of Széchenyi University was beneficiary of other grants aiming at the development of the e-learning curriculum (€4.5m), and of the scheme ‘Improvement of the regional, social and economic role of higher education’ (€1.7m).

SROP: ‘Support to knowledge transfer by higher education institutions in high-growth regions of Hungary’. In the framework of this measure €1.8m was granted to the University of West Hungary and €2.1m to Széchenyi University – both decisions were announced in 2015.

SIOP: ‘Support to investment in research infrastructure’: Széchenyi University was granted €1.5m for the renewal of several laboratories and investment in the research infrastructure.

1.6 Major investment projects Due to the characteristics of industry 4.0, the related investments do not necessarily require huge capital outlays by individual companies. The upgrading of manufacturing assets, the optimisation of processes, and the improvement of operational effectiveness through advanced computing solutions such as modelling and simulations can occur gradually, in stages. Advanced robotic or 3D printing solutions, sensors and devices can be added to the existing production systems without jeopardising their functionality. The fact that legacy systems can be integrated with new technologies accounts for the phenomenon that instead of one or a couple of major investment projects, the West Transdanubian region is characterised rather by a relatively large number of industry 4.0 projects. Nevertheless, the majority of the large-scale projects, where not only individual applications were implemented, but complex cyber-physical production systems installed, were implemented by well-capitalised flagship foreign-owned companies, such as Opel Szentgotthárd, Audi Hungária, Nemak Győr, Sick Ltd. or by large Hungarian companies such as Rába Automotive Holding. These investment projects were carried out partly in-house and partly jointly with scientific research institutions such as university departments and public research institutes, and/or engineering and technical consultancy firms, or specialised contract research providers. Since these latter firms are Hungarian-owned SMEs, their participation exemplifies the opportunities advanced manufacturing projects open up for local innovative companies.Another feature of industry 4.0 is the extremely distributed character of knowledge. As one of the interviewees remarked, in an advanced manufacturing environment, where the production system as a whole and their individual components are extremely complex, the development of a production system, together with the necessary measurement and testing tasks requires the combination of interdisciplinary, specialised knowledge components. Hence, investment projects need to leverage distributed knowledge, and cannot be confined to intra-regional collaboration. Project implementation necessitates flexible networks comprising stakeholders that are experts in specific fields, which may require the involvement of collaboration partners located in other parts of the country and/or abroad. In industry 4.0 projects it often happens that only one or two actors in the


whole country, or even in Europe are experts in a specific field or possess the required specialised measurement or testing equipment, consequently they have to be involved in the collaboration.The flipside of the coin is that industry 4.0 technologies allow for regional actors’ reliance on distributed knowledge. Consider cloud manufacturing, where analysis, decision making and intervention rely on spatially distributed services. Consequently, industrial engineering problems and their solutions are no longer strictly confined to specific industrial locations (Galambos et al., 2015).One example of research-based collaboration between a key industrial company of the region and a scientific research institution outside West Transdanubia, is the long-standing collaboration between Nemak Győr, the local subsidiary of a Mexican company specialised in the production of aluminium cylinder heads and engine blocks, and the University of Miskolc (in North Hungary). Researchers of the University of Miskolc (Metallurgical and Foundry Engineering Institute) provide expertise in the development, analysis and measurement of alloy properties. However, in 2014, this extra-regional collaboration became partly intra-regional. The two parties signed an agreement that the University of Miskolc establishes an ‘Alloy Casting Nemak Faculty’ in Győr, engaged both in dual education and in research activities that support Nemak’s operations and Nemak extends its funding of and collaboration with the University.This agreement is a salient example of economies of agglomeration boosting the market for technology and enhancing regional innovation (Arora and Gambardella, 2004; Feldman, 2000). If a region is strongly specialised in advanced manufacturing, this enhances the local market for technology, and may result in the concentration of specific research competences in the given area. A similar example was the agreement signed in 2015, between the Institute for Computer Science and Control of the Hungarian Academy of Sciences (SZTAKI) and Audi Hungária. Accordingly, SZTAKI established a division in Győr, at the premises of Széchenyi University. The three parties, (SZTAKI, Széchenyi University and Audi, together with the representatives of the city of Győr) agreed to create an Automotive Industry Centre of Excellence (J3K), specialised in the development of up-to-date computing and control techniques. J3K researchers will carry out applied and basic research projects also in the field of material science and industry 4.0 production planning and scheduling solutions. A major industry 4.0 investment project was implemented by GM Opel. Opel has been operating for 25 years in Hungary. Over this period, it has extended its local production capacity several times, adding new plants and/or new production lines to the existing ones. The total amount of Opel’s investments in its Szentgotthárd facilities amounts to ~€1.5b. Opel’s recent investment was the inauguration of a new Flex Plant in 2011 where small & midsize petrol engines and midsize diesel engines are manufactured. The name of the plant refers to the flexibility of the production system: different engine families can be built on the same lines. The production system at this plant can be labelled as a showcase of industry 4.0: cyber-physical production systems (with 2D matrix, data chip and radio-frequency identifier tags) track and manage machinery across the system, and generate and supply huge volume of production-specific data. A flagship Hungarian company in the West Transdanubian region, Rába Automotive Holding Plc. carried out several advanced-manufacturing-specific technology development projects in the past couple of years. For


example, the expansion of production, more specifically the machining of knuckles, involved the automation of manufacturing cells: cells previously operating on a stand-alone basis were turned into robotised cells. Rába’s investment in welding robots and CNC laser cutting machinery necessitated the relevant transformation of production cells as well. Earlier, in 2010, Rába established a Development Institute, specialised in firm-specific engineering solutions, and product and technology development. Rába engineers’ development and design activities rely partly on Matlab’s Simulink programme and on dSpace prototyping system. A recent major research project was the ‘Oil Management Programme’, aimed at embedding smart oiling system (on-demand lubrication) in a recently developed version of Rába’s axles. Together with the reduction of mechanical losses, the newly developed system resulted in increased durability and improved efficiency. Research and development, carried out in collaboration with Bay Zoltán Nonprofit Ltd. for Applied Research was supported by the Economic Development Operational Programme. The main source of public support to West Transdanubian companies’ advanced-manufacturing-specific investments was the Economic Development Operational Programme of the New Széchenyi Plan. The investment projects of a number of companies in the region were co-funded by this OP. Examples include Jankovits Hidraulika, a Hungarian-owned SME, specialised in designing, developing and manufacturing customised, special purpose hydraulic equipment; industrial automation solutions; and design and manufacturing of electric controls. Above and beyond being the supplier of a number of companies in the region (e.g. Audi, BOS Automotive Products Magyarország, IGM Robotics, Luk Savaria, Nemak Győr) this company maintains close collaboration with Széchenyi University. The supported investment project involved among others an investment in a measurement laboratory with 3D measurement solution, applied among others for the diagnostic testing of hydraulic systems.A similarly successful domestic-owned SME, with two plants in West Transdanubia is Borsodi Műhely Ltd., specialised in the design and production of custom-made devices and production lines; machining; thermal treatment; measurement and calibration; materials testing; remanufacturing and repair. In order to meet regional and extra-regional customers’ expectations, the company has implemented a large number of investments in advanced manufacturing solutions. These investments were supported by various calls of the Economic Development Operational programme (e.g. ‘Support to investment in the application of innovative results – investment in technology development’; ‘Support to investment in companies’ complex technological innovation activities’; ‘Support to investment in companies’ IT development). Examples of the company’s investments in advanced manufacturing solutions include the procurement of 3D measurement and scanning equipment, the upgrading of the materials testing laboratory, and the integration of SolidWorks solutions (3D CAD) in the work of the company’s R&D and engineering department. Furthermore, Borsodi Műhely regularly collaborates with Széchenyi University researchers. Its R&D-collaboration targets computer-aided process optimisation, computer-aided product development solutions, and the development of measurement technology.Other interesting examples of investment in advanced manufacturing are related to the solutions of HNS Technical Development Ltd.. HNS is a Hungarian-owned engineering firm and contract services provider in Győr,


specialised among others in designing and building industrial automation solutions, measurement and testing devices, and software solutions for process data collection. The company developed a statistical process control and quality assurance software solution and other special software, e.g. for microcontroller-based production monitoring. Its software solutions allow for acquiring and analysing process data, and preparing documentation (such as machine capability, process capability studies, tool wear analysis, etc.). Furthermore, HNS develops customised measurement and control devices. One example of HNS’s projects is the integration of an up-to-date measurement solution in Rába Automotive’s production system (the project was supported by the National Innovation Office). HNS’s expert have carried out a similar, customised measurement integration solution (thermal measurement) also for Audi Hungária. HNS was beneficiary of several public support programmes targeting innovation and technology development. It collaborates with various higher education institutions and companies within and outside the region.Altogether, this far from exhaustive list of advanced manufacturing projects demonstrates that above a certain threshold size, regional manufacturing companies in West Transdanubia are aware of industry 4.0 trends and challenges, namely that new disruptive technologies will transform manufacturing, but at the same time they offer huge opportunities for achieving operational excellence and improving customer responsiveness. Regional stakeholders’ investments in advanced manufacturing solutions have so far received generous public support: investments of a large number of companies, in both hardware and related software, have been supported. Conversely, no support measures target complementary organisational or business model innovations. Public co-funded projects have so far supported only companies’ market-oriented technology development projects rather than pilot or demonstration programmes aimed at the demonstration of concepts and the diffusion of new technological solutions. However, as outlined in section 1.8, in the current programming period, this objective will also be incorporated in the policy mix.

1.7 International cooperation There are few ongoing international collaboration projects that integrate regional stakeholders. One of the H2020 projects is INNO-HUN2015-16 (coordinated by the Hungarian National Trading House). In this project, one of the participants is the Chamber of Commerce of Győr-Moson-Sopron county. The aim of the project is services provision to enhance the innovation management capacity of Hungarian SMEs within the framework of the Enterprise Europe Network (EEN).WT’s stakeholder have long been aware of the opportunities EEN provides for them, and have harnessed EEN’s services that facilitate their internationalisation. Examples of these services include technology transfer consultancy, information provision about foreign calls for tender, consultancy regarding access to financing, IPR consultancy and consultancy about participation possibilities in international R&D programmes. Recently EEN launched an ‘Ambassador Programme’ with SME ‘ambassadors’, that is EEN-partners whose cases demonstrate and illustrate the advantages of EEN’s services. There are two EEN ambassadors from West Transdanubia. The activity of Konsys International Ltd. is closely related to industry 4.0, since it is specialised in factory energy management systems, industrial automation and remote


engineering assistance provision. Besides collaborating with and supplying to manufacturing companies (e.g. to Schneider Electric; to suppliers to Audi Hungária, etc.) in WT and in other Hungarian regions, Konsys managed to internationalise rapidly, due partly to EEN’s services.Another example of industry 4.0-related international collaboration involving a WT stakeholder (Széchenyi University), is HUNOROB, a Hungarian–NOrwegian research project for the ‘development of new, environmental friendly, competitive ROBot technology for selected target groups’. This project is funded by EEA Grant, a grant from Iceland, Liechtenstein and Norway through the EEA Financial Mechanism and by the Hungarian National Development Agency (the original Hungarian contractor). The project is coordinated by SZTAKI (more specifically by its 3D Internet-based Communication and Control Laboratory). One of the key deliverables of this project was the establishment of a virtual collaboration platform (VirCa: Virtual Collaboration Arena). VirCa allows for real-time internet-based collaboration in a shared 3D interactive virtual environment. This virtual reality technology and platform is bound to become a key application for companies that try to develop their manufacturing processes, solve technical problems or simply operate multi-site, globally distributed production systems. Some of WT’s flagship companies participate in international collaboration projects that involve both domestic and international science centres. Audi Hungária, for example, contracted the Engineering and Management Research Laboratory of SZTAKI and the SZTAKI–Fraunhofer Project Centre for Production Management and Informatics to develop a production planning system for the motor assembly lines. The system was also tested by Fraunhofer Austria.One of the most common channels of international collaboration that was identified among the surveyed companies is intra-MNC collaboration involving also the international customers of the given firms. New product development necessitates the setting up of dedicated cross-functional teams involving experts from the headquarters and from various development centres located at selected subsidiaries of the parent company. Representatives of manufacturing facilities also participate in this joint work and provide their expertise about process-related issues (manufacturability: feasibility of the design in an engineering sense; possibility to integrate the new product in the existing production system, expected difficulties during production ramp-up, necessary changes in layout. In this vein, in the course of a new product development process, the engineers of the surveyed subsidiaries would also regularly travel to the meetings of their dedicated teams and, back home, they continue working on the basis of virtual collaboration.

1.8 Policy support and delivery mechanismsCompared to advanced economies, the importance of industry 4.0 trends and the necessity of a national-level industry 4.0 strategy were recognised relatively late in Hungary: it was only in early 2016 that the Ministry for National Economy launched a series of preparatory meetings for setting up an industry 4.0 working group. Several meetings were held and attended by the representatives of science, education, policy and the corporate sector: by industry 4.0 technology users and technology producers. Obviously, even previously there were a number of related policy interventions, support instruments and strategic programmes in place. The support measures targeted investment in technology development,


industry-university collaboration, investment in universities’ research infrastructure, and adoption of advanced ICT-solutions. Some of the strategic programmes were partly related to industry 4.0. Examples include the ‘Digital Nation Development Programme’; the ‘National ICT Strategy 2014–2020’; the ‘Digital Welfare Programme’, the national R&D and innovation strategy: ‘Investment in the Future 2013 – 2020’, and a number of industry-specific programmes: the so-called white books, such as the R&D&I Sectoral White Book of Information and Communication Technology.As the above list of strategic programmes indicates, industry 4.0-related strategic thinking and development planning have been in place already for years, albeit in a fragmented form. During the preparatory work and strategy development for the 2014 – 2020 programming period, it was recognised that an integrated strategic plan needs to be drafted that targets the development of the manufacturing sector. This strategic plan, the Irinyi Plan was completed some years later: it was adopted in 2016. It tries to integrate the previous sectoral programmes and the fragmented support measures into a coherent programme that is aligned with Hungary’s Smart Specialisation Strategy (S3), and with the EU strategic objective to boost reindustrialisation. In line with this latter objective, the target indicator specified by Irinyi Plan is to increase the GDP share of manufacturing, from the current 23.5% to 30% by 2020. Overall, Irinyi Plan tries to integrate the manufacturing-specific components of the existing programmes, complement them with new aspects and design a coherent, manufacturing-focussed strategy. This plan would also integrate some of the previous instruments of economic and regional development programmes and make them more focussed on manufacturing. Conversely, the industry 4.0 working group and the national industry 4.0 strategy (to be completed by the second half of 2016) will incorporate industry 4.0 aspects in the overall manufacturing development strategy and establish clear priorities within the Irinyi Plan.The horizontal priorities of the Irinyi Plan that are related to industry 4.0 are, adoption of new digital technologies; improvement of energy- and raw material efficiency and support to R&D related to smart products – especially within the priority sectors specified in Hungary’s S3 strategy (automotive industry, special machinery, health industry and tourism, ICT, eco-industry, food industry and defence industry). The horizontal priorities specified at the kick off preparatory meeting of the industry 4.0 working group are industry 4.0 related education and competence development, awareness development; targeted support provision to SMEs and to the representatives of the Hungarian high-tech ecosystem. Furthermore, one of the key tasks of the working group is to have industry 4.0 aspects integrated in economic and territorial development priorities, and also in all support instruments that target economic development, for example, in investment promotion instruments and in R&D&I promotion instruments.Both Irinyi Plan and the upcoming National Industry 4.0 Strategy are national-level initiatives. As outlined more in detail in the subsequent sections (sections 2.2 and 2.4), over the past couple of years, economic and territorial development were radically restructured in Hungary.


With the State Territorial Administration Reform launched in 2010, the Hungarian government decided to return to the traditional public administration and territorial development system, where counties (NUTS3 regions) are the basic units and not NUTS2 regions. At a regional level, this shift to a smaller spatial scale in public administration became manifest in the drafting of a large number of parallel strategies. In West Transdanubia for example, alongside the regional smart specialisation strategy (RIS3) that was completed in 2013, three county-level strategies were prepared in 2014. Furthermore cities with county rights (in WT: Győr, Sopron, Zalaegerszeg, Szombathely, and Nagykanizsa) also prepared their own integrated settlement development strategies.Although each West Transdanubian strategy places considerable emphasis on economic development in general and on the development of the manufacturing sector in particular, only one out of this multiplicity of strategies mentions formally the issue of smart development: the integrated settlement development programme of Győr. All other strategic documents elaborate on traditional policy fields (e.g. investment promotion and, in particular, FDI promotion; the promotion of domestic suppliers’ integration in global value chains; SME and entrepreneurship promotion), without mentioning the new trends and challenges in manufacturing. Sub-regional strategic plans call for policy instruments that support the development of industrial parks, clusters, and foster enterprises’ investment in technology development. R&D and innovation related strategic actions, proposed by the surveyed documents include the development of science and innovation centres, technology parks and universities’ research infrastructure. Altogether, the sub-national-level strategic documents that specify the main development directions in the 2014 – 2020 period, and list the resources necessary to implement the stated development objectives are similar to the ones drafted for the previous, the 2007 – 2013 period. They do not address the new, manufacturing-related developments, trends and challenges explicitly.One exception is Győr, more specifically, its integrated city development programme, where the concept of smart development received due emphasis. Knowledge-based regional development in Győr is obviously related to the automotive industry. The programme envisages the development of an automotive-industry-related knowledge centre, and investment in advanced manufacturing related Living Labs. Here, the programme explicitly mentions industry 4.0 concepts, such as ‘digital factory’, ‘learning factory’, industrial robotics, and emphasises the necessity of investment in modern measurement equipment. One of the stipulated objectives is the establishment of incubators, the promotion of technology-oriented start-ups, and the drafting of a formal technology transfer strategy. Industry–university collaboration is going to receive a further impetus through the creation of a formal ‘Higher Education – Industry Cooperation Centre (FIEK)’: in line with a specific support instrument, launched in the current programming period. This aspect (alignment with the existing policy instruments) is highly important, since the above-listed strategic documents – whatever their content and quality is – have little relevance for policy implementation. Policy implementation is centralised: the content of the calls for projects is decided centrally, and the selection of the beneficiaries is also decided centrally. Hence, the content of sub-national strategic documents, i.e. the formal inclusion of industry 4.0 objectives or the lack thereof, is irrelevant:


it does not influence the content of the calls for projects (these latter are identical within the country: regional specifics are ignored).Of course this policy delivery mechanism does not exclude that regional specifics be taken into account, since the support measures are broadly formulated, allowing for a variety of project objectives. Examples of broadly-formulated measures of the prior programming period that were funded from the Economic Development Operational Programme, the Social Renewal Operational Programme and the Social Infrastructure Operational Programme of the New Széchenyi Plan include ‘Support to investment in market-oriented R&D’; ‘Support to business enterprises’ complex technological innovation’; ‘Support to SMEs’ complex technology development’, ‘Support to knowledge transfer in high-growth regions through collaboration with regional higher education institutions’; Support to research on progressive ICT and to related higher education initiatives’; ‘Support to the implementation of high-performance ICT infrastructure’. When responding to these calls for projects, it is up to regional stakeholders, whether they prepare project applications that are aimed at the adoption of industry 4.0 technologies. As outlined in the previous sections, regional stakeholders in West Transdanubia are aware of industry 4.0 challenges and have already implemented various industry 4.0 projects and/or invested in advanced manufacturing technologies and were supported from the Economic Development OP. Nevertheless, the effectiveness of this policy delivery mechanism is far below the optimal. Instead or calls for projects tailored to the specialisation patterns of individual regions, regional characteristics can be identified through the analysis of the content of the project applications submitted to centrally announced and across-country-identical support measures. The problem with this delivery mechanism is that regional innovation policy implementation is a two-way street. It is necessary but insufficient that policy considers and supports bottom-up initiatives. Policy also needs to channel regional bottom-up ambitions and reinforce the recognised beneficial specialisation patterns by incorporating regional specifics in the content of support measures. If policy simply reacts to bottom-up initiatives through supporting well-designed project applications submitted to broadly formulated calls for tender, only the proactive stakeholders that are aware of the future challenges and opportunities will be supported. Conversely, if support measures are regionally-tailored, i.e. designed to reinforce regional specifics, or channel regional specialisation towards specific priorities, this can intensify the beneficial trends driven by bottom-up ambitions. In the previous programming period, there were only two support measures within the Economic Development Operational Programme and one within the Social Infrastructure Operational Programme that specifically addressed industry 4.0 related objectives. The first one was ‘Support to business enterprises’ investment in ICT-based process development and in e-commerce solutions’. Although there were 130 beneficiaries of this policy instrument in West Transdanubia, the majority of them used the received support not for the introduction of cyber-physical systems and the implementation of the related process development, but rather for the implementation of enterprise resource planning solutions. The other measure was ‘Support to the establishment and the development of corporate SAAS (software as a service) centres’, but this call for project had no beneficiaries in West Transdanubia. Similarly, the support measure: ‘Support to the implementation of high-


performance ICT infrastructure’ funded from the Social Infrastructure Operational Programme had no beneficiaries in WT. Conversely, a large number of support measures were launched, envisaging the development of skills for the future (for working in an advanced manufacturing environment) through supporting the related investments in tangible and intangible assets. As it was detailed in section 1.5, local stakeholders received considerable support from these support measures.As for the planned and upcoming national-level support measures, some of them can be considered as ones that are aligned with industry 4.0 trends. Over the new programming period between 2014 and 2020, the main source of regional stakeholders’ industry 4.0 specific development will be the Economic Development and Innovation Operational Programme and the Human Resources Development Operational Programme. Ongoing support measures are similarly broad-based as they were in the previous programming period, e.g. ‘Support to SMEs’ and micro-enterprises’ investment in capacity expansion’; ‘Support to companies’ R&D&I undertakings’; ‘Support to supplier integrator companies and their suppliers’; ‘Support to Collaborations for R&D Excellence and Competitiveness’; ‘Support to Higher Education – Industry Cooperation Centres’. Again, it is up to regional business enterprises’ strategic plans and awareness of industry 4.0 trends, whether they use these support measures for industry 4.0 specific investments or not. Most of the upcoming calls are also broad-based, e.g. ‘Support to complex investment projects of medium-sized enterprises in the food industry’; ‘Support to the Excellence of Strategic R&D Centres’; ‘Support to Investment in R&D Infrastructure’.Conversely, some of the upcoming calls reflect the increased awareness of the Hungarian government of industry 4.0 trends and challenges. Past industry 4.0-specific calls: ‘Support to business enterprises’ investment in ICT-based process development and in e-commerce solutions’, and ‘Support to the establishment and the development of corporate SAAS centres’ will be launched again in the second half of 2016. These measures will be complemented with new calls, including ‘Support to business enterprises’ cloud-based services’; ‘Support to manufacturing SMEs’ investment in digital conversion and industrial automation: industry 4.0 pilot and demonstration applications’.Since the last item of this list is the most relevant from the point of view of this report, some additional details are provided. The funding envisaged for this project is ~€8m. One beneficiary is foreseen, entrusted with drafting sectoral industry 4.0 strategic plans; implementing these plans through funding the establishment and the

diffusion of pilot applications; methodological development of performance evaluation of industry 4.0

projects.Although the support measure has not been officially announced yet (it is listed among the upcoming measures) the beneficiary is already announced (Government Decree 1201/2016, Appendix 2): a two-member consortium, led by IFKA Public Benefit Nonprofit Ltd., together with the Association of ICT and Electronics Firms.The main problem with the described delivery mechanism (the inclusion of one predetermined intermediary organisation in the delivery mechanism) is that it is excessively centralised and not transparent. Scoping specific technologies and industries is possible from a central location, but the translation of technology breakthroughs into local SMEs’ new products


and/or improved competitiveness can be achieved rather through networks of regional knowledge hubs and regional/local intermediary organisations. Another problem is that observers may find it strange that right at the time the government launches an industry 4.0 working group, seemingly on a volunteer basis, and entrusts this group to provide expertise about industry 4.0 strategy development, it contracts two private, albeit non-profit intermediary organisations to carry out the same task on the basis of non-negligible funding. Note that there are overlaps: the representatives of these intermediary organisations are also members also of the industry 4.0 working group. Moreover, part of the allocated amount of €8m will be transferred to the final recipients that implement the industry 4.0 pilot solutions. Nevertheless, a clear delineation of tasks, responsibilities and the related funding is highly recommended. Similarly, a clear and transparent mechanism by which strategic plans are translated in support measures and beneficiaries get selected, could also improve the effectiveness of the implementation of the planned industry 4.0 strategy.

1.9 Good practice caseA prominent example of industry 4.0 specific good practice is the iKomp project (‘Strengthening the regional research competencies related to future-oriented manufacturing technologies and products of strategic industries by a research and development programme carried out in comprehensive collaboration’) that encompasses nine regional stakeholders: two universities (Széchenyi University and the University of West Hungary), a research institution of the Hungarian Academy of Sciences (SZTAKI) and six companies, including local subsidiaries of large blue chip global companies, subsidiaries of relatively smaller multinational corporations and Hungarian-owned companies.The origin of the iKomp consortium can be traced back to a decade-long networking activity among a large number of stakeholders in the region of Zalaegerszeg (the capital of Zala county). The network comprises representatives of manufacturing firms: SMEs, large Hungarian-owned companies, subsidiaries of multinational corporations, innovation management and consultancy firms, NGOs, industry associations, a public foundation (for the tertiary education in Zalaegerszeg), universities and public research institutes. The mission of this network is to contribute to the innovation-oriented development of the region, and enhance industry-university collaboration. Note that the boundaries of the region are loosely defined: the network comprises stakeholders also in Szombathely and Szentgotthárd: both in the neighbouring Vas county (see also section 2.5).Above and beyond a regular exchange of information about investment needs, future directions of regional development, or about domestic and international tenders, the main field of network members’ collaboration is the organisation and provision of dual vocational training for both vocational school students and university students.One commonality of network members’ activity is that it is closely related to advanced manufacturing: either because they are manufacturing firms in automotive, electronics, machinery and metal processing industries, or they are specialised in advanced manufacturing-related research, or are engineering and technical education services providers, or they are simply interested in the innovation-based regional development of West Transdanubia.


Members of the network regularly participate in calls for tender of support measures that aim to promote innovation and technology development, investment in research infrastructure, or innovation collaboration. When the Hungarian government launched the EU co-financed ‘R&D Contracts of Competitiveness and Excellence’ (RDCCE) programme, several network members decided to form a consortium and apply for funding of their long-nurtured technological development plans and R&D programmes. The RDCEE support measure intended to support large-scale research development and innovation undertakings carried out in collaboration. Expected beneficiaries were consortia consisting of public research organisations and business enterprises. The minimum amount of funding to be applied for was €1.7m, and the maximum foreseen was €13.6m.The description of iKomp project recalled what is referred to as ‘West Transdanubia’s innovation paradox’, namely that in the light of the usual innovation indicators the region’s innovation performance is rather meagre, which is in sharp contrast with its good economic performance. Therefore, iKomp addresses a ‘Highly industrialised region in the western part of Hungary with limited R&D capacity’. This large-scale, three-year project (to be completed by June, 2017) comprises a large number of research and development objectives of the individual consortium members, to be carried out either individually or in collaboration with other consortium members (e.g. in the framework of industry–university or industry–Academy of Sciences collaboration). As it will be detailed, practically all project objectives are advanced manufacturing-specific. The funding allocated for the iKomp project is ~€5.4m (total costs of the project are projected to amount to ~€6.1m). Opel Szentgotthárd is the consortium leader. Originally, the second member in the consortium was Jabil Circuit, more specifically, its ‘Global Aftersales Services Division’ in Szombathely. Since Jabil divested its aftermarket services division right at the time the iKomp consortium was announced beneficiary of the RDCEE support programme (in 2013) and iQor Holdings Inc. acquired the given division, now iQor Hungary is the second partner in the project.Delphi Hungary is the third partner: a manufacturer of engine control units and modules and various other electronic modules and assemblies. Other consortium members include Europtec Ltd., specialised in polymer components applied among others in medical, solar and machinery industries; Pylon-94 Ltd., a Hungarian-owned company, specialised in assemblies, sub-assemblies and parts of lifting devices, cranes, mobile cranes, and other steel structures; 3B Hungária Ltd. specialised in the design and production of material conveying and processing systems, including conveyor belts, bucket elevators, screens and rollers; two universities (Széchenyi University of Győr and the University of West Hungary) and the Institute for Computer Science and Control of the Hungarian Academy of Sciences.Regarding consortium members’ project activities, in December, 2015 Opel Szentgotthárd organised an interim conference, where the first results were presented. According to the press release of the conference, 99 R&D projects had been completed by that date (out of 170 foreseen). Examples include

digitalisation solutions (e.g. optimal production planning and scheduling);

computer-aided engineering projects;


http://ikomp.hu/

http://ikomp.hu/

production simulation, targeting the reliability and speed of the processes;

machine perception: visual pattern recognition combined with machine learning;

investigations of machinability; materials testing and analysis; intelligent machining; prevention and control of electrostatic discharge; development of a camera system: a tool designed for a very special

environment that gives the opportunity to the engineers to study the reflow process and analyse special process characteristics.

modelling and reduction of changeover time in polymer cutting; intelligent pattern recognition; intelligent control systems; development of business analytics and data mining programmes; industrial automation projects (e.g. installation of remote laser

welding robots). Altogether, this list indicates that the majority of the R&D projects concerns advanced manufacturing specific process development. Nevertheless, as one interviewee emphasised, although their specific project involves the automation of selected activities through the installation of industrial robots: that is, a par excellence process development project, in reality this investment contributed to achieving also non-negligible product development results. The above list of activities underscores another feature of advanced manufacturing, namely that manufacturing challenges need to be addressed through innovations that cut across specific technologies (e.g. advanced sensing, measurement, computing, industrial robotics and materials science).There are two showcase examples of industry 4.0 projects carried out in the framework of the iKomp programme. The recently set-up cyber-physical production systems of Opel Szentgotthárd and iQor Hungary generate large amount of process-specific digital data. Based on the data supplied by these two firms, SZTAKI develops customised data mining / business analytics solutions, together with these two firms. The developed solutions allow for real-time analysis of process data, to be used for informed business decision making, more specifically, for better capacity control and optimisation of production scheduling, which may result in enhanced equipment utilisation.A further example is SZTAKI’s model building exercise, carried out together with Europtec, another consortium member. The model is used to predict the setup time of plastics components machining, and can be applied for process optimisation (Viharos et al., 2015).Although at this stage it is still too early to report about results and impacts, the benefits of the project are already clear. First of all, as one of the interviewees remarked, collaboration and networking among consortium members has a relatively long history, hence, this project is not the usual example of a ‘support-measure-specific consortium that lasts as long as funding is provided’. Just the contrary: collaboration had started


long before the measure was launched and has been developing ever since – even without any specific funding. Consortium members and related stakeholders have elaborated long-term development plans, and if they identify any national or international project opportunity that can be aligned with their strategic plans, they submit a tender proposal. In this vein, a bottom-up initiative has been rewarded, and the project opened up opportunities for more in-depth collaboration among members of an existing network. This aspect ensures the sustainability of the undertakings carried out in the iKomp framework.The individual activities (R&D programmes, investments in tangible and intangible assets, etc.) that are foreseen and have already been implemented in the framework of the project enhance the given stakeholders’ productivity and competitiveness. The activities implemented so far, improve their production capabilities and also their production-related technological development capabilities. They contribute to the increased agility and flexibility of the companies in question, and to the improved quality and reliability of their products. Furthermore, iKomp project reinforces the locational advantages of this region, strongly specialised in mature manufacturing industries. Altogether, these are the other factors that ensure its sustainability.

1.10 Leveraging the existing potential As outlined in the previous sections, West Transdanubia is strongly specialised in mature manufacturing industries, in particular, in automotive, electronics, machinery and metal processing & casting. Due to a massive inflow of foreign direct investment in these industries; to the non-negligible upgrading performance of the local subsidiaries; and to the entrepreneurial behaviour and continuous investments of domestic-owned SMEs supplying MNCs’ local subsidiaries, the performance of manufacturing improved rapidly, both in quantity (output, employment, export) and in quality terms (resource efficiency, productivity, local backward linkages with component suppliers, knowledge-intensive services providers and R&D centres). The results of this research show that not only flagship foreign-owned companies have implemented industry 4.0 solutions: high-performing domestic-owned companies have also made good progress towards the adoption of selected applications. The results also indicate that far more enterprises are engaged in advanced manufacturing related R&D than what the official R&D statistics suggests. Altogether, regional stakeholders in West Transdanubia are aware of the technological developments in their industries, and of the requirements these new developments mean for them.West Transdanubian stakeholders’ relative high awareness of and preparedness to industry 4.0 trends, challenges and opportunities are explained by

economies of agglomeration and the demonstration effects of flagship MNC subsidiaries;

the beneficial role Széchenyi University played in the region’s upgrading process;

massive public funding of investments into universities’ research infrastructure and into the technology development of manufacturing enterprises.

Last but not least, the fact that West Transdanubia is a ‘factory region’ where production capabilities account for regional competitiveness, is also


an important facilitator of the diffusion of industry 4.0 applications. Making factories smart is the easiest part of digital transformation. MNC-owners and high-performing domestic companies are committed to invest in advanced solutions, because, as outlined previously, legacy systems can be integrated with new technologies: advanced solutions can be added to the existing production systems. Moreover, companies increasingly collaborate with contract research services providers to solve process-related technical problems, support selected processes and achieve thereby an incremental improvement of their production capabilities. Conversely, the transition to competition with ‘digital-world’ business models, that imply innovative digital services provision, platform competition, entry in new industries, and product differentiation based on a big-data/business analytics-based thorough knowledge of customers (cf. Porter and Heppelmann, 2014): in brief, the digital transformation prevalent in headquarter economies, is by an order of magnitude more difficult and more costly than simply digitising the shop-floor.Consequently, upgrading to become exposed to headquarter-economy-type challenges is a major long-term requirement for the domestic stakeholders of this region. Nevertheless, some ‘more traditional’ challenges are also present, with regards to achieving balanced growth, and sustaining the competitiveness of this factory region in an industry 4.0 environment.

Challenge 1: Reduce disparities in adopting industry 4.0 solutions

The interviews carried out in the framework of this assignment indicate that the adoption of industry 4.0 solutions is not a ‘yes or no’ issue: it is rather a long, gradual evolutionary journey including both incremental and radical transformational changes. Although the largest gap is manifest between technology adopters and non-adopters, there are substantial differences also across adopters.By the mid-2010s only the highest-performing companies have implemented a diversified set of industry 4.0 applications. A large number of companies, including medium-sized ones rely on advanced measurement technologies for testing. Some firms apply 3D modelling techniques for prototyping. Several firms have adopted digital quality management systems, however, their solutions are mostly limited to digital documentation systems. Indeed, there is plenty of scope for development in this field, for example through incorporating advanced sensing technologies (computer vision) in quality control, and/or applying advanced computer algorithms and big data to analyse the occurrence and the properties of faults (big data for root cause analysis). Numerous companies have implemented industrial automation solutions, though there are huge differences in the degree of industrial automation. Some processes in selected firms are up to 90% robotised (e.g. some processes at Delphi Hungary, the paint shop at SMR Hungary, and the processes in Audi Hungaria’s body shop8 and paint shop), and some companies also apply automated material handling systems, enabling material transport from one machine to another. Conversely, in the case of other firms, the reported leap towards industrial automation denotes the purchase of a (couple of) CNC mill(s), welding robot(s) or laser cutting robot(s).In contrast to the prevalence of some ad hoc investments in industrial automation, few companies in West Transdanubia have incorporated complex cyber-physical solutions (e.g. embedded sensing, measurement


and control systems) in their production systems, e.g. to control capacity, optimise production scheduling and throughput, and/or apply predictive maintenance. Few companies use industry 4.0 technologies for smart energy consumption.9 There are some companies that gather data generated during the production process, but few of them can use these data for business analytics purposes. Altogether, despite a relatively good average performance with respect to the diffusion of industry 4.0 technologies, there are large intra-regional, and size- and ownership-related differences in this respect. Even the relatively advanced users of industry 4.0 applications lack a systematic digital strategy. Going after a particular outcome, they invest in selected advanced solutions, but do not perceive the necessity of elaborating the company’s strategic roadmap of digital transformation.These disparities among adopters and the number of non-adopters can be reduced, through a systematic provision of intermediary services, e.g. through information provision on trends, expected impact of technology adoption and government support opportunities, and through the provision of technical expertise and market insights. These services can deliver only if they are tailored to individual firms’ needs. Large events that combine technology presentations and offer networking opportunities are not sufficient: firm-specific processes and value streams need to be reviewed, and information provided on customised automation solutions, and/or on ways to scale-up prior investments. Funding for these services can be provided in the form of innovation vouchers. Challenge 2: Improve the return on investments in universities’

up-to-date research infrastructureAs detailed in the previous sections, large-scale public funding has been allocated to enhance universities’ research infrastructure. Although the establishment of new laboratories has enhanced industry–university collaboration, and has had beneficial impact on practice-based higher education while ensuring non-negligible income to universities, return on investments shows large disparities across universities and equipment items. Moreover, universities in West Transdanubia do not participate in industry 4.0 related H2020 research projects. A systematic business model needs to be elaborated by each university to ensure fair return on public investment in research infrastructure. Additional staff needs to be hired, entrusted with research infrastructure-specific business development. However, in contrast to a generous allocation of funding for investment in research infrastructure, universities’ institutional funding by the government is very limited, failing to cover even basic operational expenses. Hence, the hiring of additional staff for business development and for the administration of H2020 tenders often proves unfeasible for universities. Consequently, the funding of higher education needs to be completely reconsidered. Challenge 3: Increase the number of available qualified

employees through expanding and upgrading industry 4.0-related higher education

Interviewed executives were unanimous in claiming that the most important barrier of their local expansion and upgrading is the lack of qualified employees. Although non-negligible improvement has been achieved in West Transdanubia in this respect, industry’s demand for skills has been growing at an even higher pace, which made the shortage of (among others) qualified engineers with competencies in IT technologies, even more pressing than before. In the ‘second machine age’, despite all


upgrading, industry 4.0-related higher education in West Transdanubia (and in Hungary) seems to fall behind in ‘the race between education and technology’.10 Despite a seemingly hopeless race to align education with industry needs (new technologies generate demand in new kinds of skills faster than education could respond) it is indispensable to move forward: expand the number of engineering students and improve the quality of their education further. West Transdanubia can boast of several innovative solutions aimed at enhancing enthusiasm for technology and engineering. Examples include the establishment of the interactive science centre and exhibition building: Mobilis, a showcase of the science behind vehicle manufacturing, and the organisation of regular technology talent competitions sponsored by flagship firms in the region. Based on the results of this report, it can be concluded that possible future orientations and opportunities in the area of industry 4.0 in West Transdanubia lie in Exploring new collaboration opportunities by improving regional

stakeholders’ participation in EU-level research programmes, platforms, and multi-region initiatives

Currently, West Transdanubian stakeholders do not participate in EU-level and multi-region programmes, platforms and initiatives that promote industry 4.0-related technology adoption (except for Audi that participates in a H2020 programme, together with SZTAKI). Most of them are not even aware of these initiatives, e.g. of the EuroCPS project, the CloudSME project, the I4MS project, the Smart Anything Everywhere project, the Echord project, the Factories of the Future Initiative, the Vanguard Initiative and so forth. The reason is not disinterest, problems are deeper. On one hand, stakeholders’ low awareness can be explained by institutional changes: by changes in the institutional framework of the design and implementation of regional innovation policy, in particular by the hollowing out of the regional innovation agency (see more details in section 2.2). Another explanation is that Hungarian SMEs have no means to monitor European initiatives that are aimed to help SMEs to adapt to global competitive pressures among others by adopting new technological solutions. They have no staff entrusted to respond to calls for tender and implement pilot programmes. Nevertheless, SMEs’ awareness of these programmes and initiatives and, in particular, of good practice cases could be increased by launching a national project that aims at information provision to SMEs about these initiatives. The selected beneficiaries of this support measure will be entrusted to translate information published on these websites, promulgate the results and combine information provision with targeted, client-specific coaching about the ways to participate in these initiatives. Increased SMEs’ awareness would intensify the diffusion of industry 4.0 technologies. Launching a ‘manufacturing extension programme’The gap between adopters and non-adopters of industry 4.0 technologies could be diminished by launching a programme that is similar to the agricultural extension programmes adopted in the U.S. following World War II, and later, also in a number of developing economies. The purpose of agricultural extension programmes was to provide information to farmers about technological developments and research results in agriculture, and educate them through demonstrations, lectures, and coaching services. Thereby, extension enhanced farmers’ productivity and


income. It enabled farmers to clarify their own objectives, and identify the necessary means to achieve these objectives (Anderson and Feder, 2004).In a similar vein, ‘manufacturing extension’ could contribute to SMEs’ awareness increase of industry 4.0 technologies, and it would help them getting started with initial applications. Note that according to a McKinsey investigation, there is a high uncertainty among most manufacturers regarding what implementing industry 4.0 really requires of them – and many are still struggling to even get started (McKinsey, 2016). Drafting and implementing a regional industry 4.0 initiative and

introducing regionally decentralised dedicated support instruments

In line with similar initiatives at Hungary’s peers, previous fragmented policy efforts are going to be integrated in a coherent national industry 4.0 strategy. Nevertheless, there are plenty of European examples that national strategies are complemented with regional-level strategies that take regional specifics in mind or are implemented in a regionally decentralised manner. Examples include the ‘Factory of Future’ initiative of Ile de France, the Mazovian (Poland) ‘Digital Manufacturing for the SME’; the Flanders Make/iMinds in Belgium; or the Spanish ‘Estrategia de Fabricación Avanzada’ of the Basque region. Well-designed and well-communicated regionally-tailored industry 4.0 initiatives will not only increase stakeholders’ awareness, but will also become a strong incentive for private investment.


2. Regional Innovation Performance Trends, Governance and Instruments

2.1 Recent trends in innovation performance and identified challengesWT is a moderate innovator region: most of its innovation performance indicators are 50 to 90% of the EU-average. Among the Hungarian convergence regions, West Transdanubia features the most spectacular development in terms of innovation performance, albeit starting from a low basis in the mid-2000s. WT used to rank last among Hungarian regions in terms of all major innovation indicators. Its meagre innovation performance, especially in the light of a relatively good economic performance, used to be referred to as WT’s innovation paradox: innovation performance was much inferior to what the region’s relatively good economic performance would suggest.The 2014 value of regional GERD was by more than 40% higher than the one in 2010, still, even then it accounted for only half of the national GERD/GDP (regional GERD was 0.65% of regional GDP while the national average was 1.37%). Other innovation input indicators have also increased considerably, for example that of the number of research departments. While there were altogether only 188 research departments in 2005 (public research organisations, higher education-based ones and corporate research departments), this number increased rapidly to reach 256 in 2010. After 2010 however some fluctuation began in this indicator: after an initial reduction the indicator recovered to 252 by 2013. According to the preliminary data for 2014, there was a radical setback: in 2014 only 209 research departments were recorded. Regional information sources cannot explain this phenomenon. Note that a similar reduction is manifested at the national level: the number of research departments in Hungary was cut by 165 in 2014 compared to 2013. A similar cut was recorded in terms of the number of researchers (FTE). This indicator was 1958 in 2013, and only 1715 in 2014. If a longer period is considered however, the evolution cannot be debated: compared to 2010 the number of researchers increased by 8% and compared to 2005: by 77.5%.In summary, innovation indicators increased rapidly and spectacularly since the mid-2000s and this trend was non-abated during and after the global crisis (while the developments in 2014 remain to be explained). Despite a dramatic increase in innovation input indicators, WT’s innovation performance still lags behind the EU average and is also inferior to the Hungarian average, in a number of respects. It performs below 50% of the EU-average, on indicators related to the performance of the business sector. ‘SMEs innovating in-house’ is one third; ‘EPO patent applications’ is approximately one tenth of the EU-average. (Source: Regional Innovation Scoreboard, 2014). The share of SMEs introducing product, process, marketing or organisational innovations is less than the half of the EU average. Nevertheless, there are a couple of indicators with respect to which West Transdanubia performs close or even above the EU average, for example, the ones related to the industry mix and to specialisation, such as ‘employment in medium-high and high-tech manufacturing’, and ‘share of employment in 2 or 3 star clusters’. Note that despite a high degree of clustering, i.e. despite the geographic concentration of companies in the


same and in interrelated industries, and despite the presence of supporting industries and specialised infrastructure, West Transdanubia has only one official ‘accredited innovation cluster’ (AIC): the Pannon Wood and Furniture Cluster (in Hungary there are altogether 34 AICs). The failure of stakeholders to institutionalise the bottom-up clustering process and gain accreditation is a serious deficiency, because important amount of public support is earmarked to AICs.11

Figure 2 quantifies the evolution of selected performance indicators of regional innovation. Data make it clear that the global financial crisis had little impact on these indicators: except for R&D outlays, during the crisis years there was no observable deterioration in the indicators. Moreover, regional GERD also recovered rapidly and returned to its prior evolving trend.Figure 2

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0200400600800

1,0001,2001,400

0.010.020.030.040.050.060.070.080.090.0

Innovation performance in West Transdanubia

R&D units No. Of researchers FTER&D outlays (€m)

Num

ber

(R&

D u

nits

and

FTE

re

sear

cher

s)

R&

D o

utla

ys (€

m)

Source: Central Statistical OfficeDespite all these improvements, regional innovation performance is still meagre in a comparative perspective. 2013 was the top year in terms of R&D outlays, with a value of €76.4m. This was less than 10% of the value of the respective indicator of Central Hungary, the top performing Hungarian region, and only 27.8% of the EU28 (regional) average. When benchmarking another indicator: the number of researchers FTE, as a percentage of total employment, West Transdanubia’s position seems slightly better: it is 23% of the respective indicator in Central Hungary and 37.5% of that of EU28 (regional) average (in 2013).There are two major explanations behind the improvement of innovation input indicators. The first one is production expansion and upgrading at MNC subsidiaries in the region. As the expansion of production was usually accompanied by investment in process development and in some cases also in product development capabilities, and by an enhanced collaboration with Széchenyi University, after a while, local subsidiaries officially established their own R&D or engineering centres, and test laboratories. Note that local manufacturing subsidiaries co-evolve with their parent companies: as manufacturing facilities they regularly start manufacturing newly introduced products (product upgrading). Parent companies invest


in up-to-date technology and they promote the implementation of related managerial innovation. Subsidiaries keep absorbing parents’ intangible investments through implementing the headquarters’ new strategic directions in management, organisational set-up, and human resources development. Subsidiary-level R&D activities are present not only in dedicated (R&D, engineering, software development) departments, but also in every corporate function. Examples include tooling, quality management, production scale-up in the case of newly launched products, and logistics. One example is SMR Hungary that received the first CEE Logistics & Supply Chain Management Excellence Award for the development of a direct distribution system. The company continuously develops its internal logistics. Logistics innovation, developed at the Hungarian subsidiary reduced production downtime caused by missing material. Another result was the elimination of intermediate storage. The number of internal transactions was reduced by one third. The Hungarian solution was awarded by the European Logistics Association and became a benchmark at the MNC-level.12

Although local subsidiaries’ co-evolution with their parent companies and their gradual uptake of advanced, R&D-intensive activities related to a variety of business functions is the main driver of regional innovation performance, this is rarely manifested in innovation output indicators. Even the ‘traditional, engineering-based’ R&D activities, such as process development, engineering and testing are rarely reported officially by local subsidiaries. As these activities are closely integrated in overall production activities, decision whether to report it and have it recognised officially as R&D activity, depends on the owners’ strategic motivations. They may decide to promulgate the existence of a formal local R&D team/department, however, since the deductibility (from companies’ innovation levies) of enterprises’ own or outsourced R&D costs was discontinued in 2012, several companies stopped reporting these expenses.13 An indirect beneficial impact of local subsidiaries’ intensified research and development activity is that it has boosted the local market for technology, especially for knowledge-intensive business services. Local subsidiaries’ demand stimulated domestic engineering SMEs’ contract research activities.The second factor that accounts for performance development is massive public funding of business enterprises’ investments in technology development and innovation. Considerable grant amounts were allocated to the business sector for research, technological development and innovation purposes, mainly from EU Structural Funds but also from the national Research and Technological Innovation Fund. The main barriers of domestic SMEs’ innovation in West Transdanubia are similar to those at the national level: poor access to funding, underdeveloped venture capital sector; deficient entrepreneurial culture, poor competences to bridge the valley of death between invention and commercialisation, and shortage of skilled workforce, especially of highly qualified engineers. As for this last item, a regional specifics in West Transdanubia is the strong ‘brain drain’ effect of the region’s flagship companies, which also accounts for the lower-than-the average value of entrepreneurial aspirations among the various sub-indices of entrepreneurship.14


In summary, despite rapid and spectacular development of the relatively easy-to-measure innovation input indicators, driven by MNCs’ expansion and by generous public support, there was seemingly little improvement in terms of the output indicators. However, part of this gloomy picture is due to underreporting of research and technological development activities.Drawing on this analysis, three challenges seem particularly relevant for the West Transdanubian innovation performance. Challenge 1: Promote technology-based entrepreneurship and

local technology providers’ integration in the value chains of MNCs’ local subsidiaries

With a vibrant economic activity in West Transdanubia, and with the rapidly evolving regional market for technology, technology-based entrepreneurs have considerable opportunities to sell their innovative solutions to MNCs’ local subsidiaries and step thereby on a growth path that may culminate in an entry in international markets. This will not only enhance local subsidiaries’ backward linkages, promote clustering and diversify the regional mix of activities, but at the same time, it will also improve the indicator of SMEs innovating in-house. Dedicated support measures should not necessarily be broad-based, they should rather target specific technology fields (such as ICT), or challenges (e.g. industry 4.0). Challenge 2: Communicate the opportunities of and promote

regional actors’ participation in European research and technology collaboration projects

The current programming period features a great number of opportunities for regional stakeholders to get engaged in supra-national research, experimental development and demonstration projects. However, despite all efforts to simplify participation and make Horizon 2020 more SME-friendly, exploiting these opportunities is still too difficult for local economic actors that are below a certain size threshold. Special coaching schemes are necessary that will not only enhance SMEs’ awareness of existing support schemes, but also organise targeted events to help them find partners and build international consortia. Furthermore, dedicated guarantee schemes combined with project appraisal programmes need to be set up to ensure access to finance to complement EU funds once the consortium of the given SME is selected as beneficiary. Challenge 3: Improve the measurement and the reporting of

innovation activities and consider also non-R&D-based innovation activities as innovation

This will not only improve regional innovation performance indicators and enhance regional stakeholders’ commitment to report the relevant activities but it may, at the same time, boost local actors’ commitment to further increase their related efforts. Recognising non-R&D-based innovation activities does not necessarily mean that targeted support measures need to be created that stipulate specifically these activities. It rather means that these companies (i.e. companies that invest in process development, or in the solution of technology problems, and also in the implementation of related organisational, management and workplace transformation) are recognised as innovators. Thus, they become eligible for support schemes that provide funding only to companies with demonstrated innovation track record.


2.2 Institutional framework and set-upIn the wake of Hungary’s EU accession, the Europeanisation of territorial governance (regionalisation) became a politically salient issue in Hungary. Administrative reforms have been implemented within a relatively short period of time, in a top-down manner, ensuring compliance to the structural and institutional conditions of access to EU Structural and Cohesion Funds (Pálné Kovács, 2015). The implementation of the subsequent procedural reforms, for example compliance to the requirements of the reformed European regional development and regional innovation policies was similarly rapid.Nevertheless, as it will be shown in this section, the transposition of EU directives in the national legislation; the establishment of the necessary institutional set-up and the implementation of the required operational procedures can be regarded mere ‘compliance on paper’.The creation of regional development and regional innovation systems that are ‘conform with Europe’ ( ) started with rapid top-down ‘regionalisation’, the creation of artificial, so-called territorial statistical regions. Furthermore, new institutions were created: regional development councils and agencies became responsible for territorial development, i.e. for designing, administering, implementing and monitoring the regional operational programmes. Regional innovation agencies (RIAs) have been established (Pannon Novum RIA in West Transdanubia) and were engaged in regional innovation strategy drafting, mapping regional innovation stakeholders, building linkages among them, developing innovation management services to promote the innovation-driven development of the given regions.

The establishment of a necessary institutional set-up benefitted from non-negligible European technical assistance. This proved indispensable, since Hungary had to create the relevant institutions from scratch. Competencies had to be developed in terms of planning, programming and drafting regional innovation strategies tailored to the specifics of the given regions. RIAs received institutional funding for six years to build up capacities and perform the public benefit activities they were entrusted with. RIAs coordinated the drafting of regional innovation strategies, and drawing on the decentralised resources of the Research and Technological Innovation Fund (25% of the Fund’s resources) they engaged in strategy implementation. By the end of the 2000s, RIAs have undergone substantial capacity development: they have accumulated regional innovation system-specific knowledge and relational capital.

Despite a seemingly impeccable operation of institutional framework and adoption of procedures, i.e. despite ‘compliance on paper’, serious deficiencies and anomalies have remained in the regional innovation system, e.g. coordination problems and parallel institutional structures, distrust among stakeholders, inferior-to-optimal allocation of support, and slow tangible improvement of regional innovation performance indicators.In response to the recognised deficiencies and anomalies the government engaged in recurrent centralisation actions, retracting more and more decentralised authorities. RIAs’ capability to influence regional innovation strategy implementation diminished substantially over time. While in the mid-2000s they could still influence the content of regionally decentralized innovation support programmes, and include regional specifics: later the content of these calls were decided upon centrally, by the National Office for Research and Technology. The national government gradually withdrew from funding regional innovation undertakings from regionally


decentralised resources. As of 2010 no regionally earmarked programmes were launched. Support of regional innovation undertakings was available uniquely from the centrally managed Operational Programmes (OPs): from the Economic Development Operational Programme and from the so-called ‘Regional Operational Programme’ that was also managed centrally, by the National Development Agency.As of 2010, RIAs received no more budgetary funding to cover the costs of their public benefit activities. To survive, they reorganized their activity portfolio and shifted to for-profit innovation support activities. The last time they were entrusted with the coordination of regional innovation strategy drafting was in 2013, when they coordinated the preparation of regional research and innovation strategies for smart specialisation (RIS3). Nevertheless, as it will be shown later, with the complete separation of planning (strategy preparation) and implementation, the procedure of regional innovation strategy drafting is a formalistic exercise.The traditional institutional instability that characterises the Hungarian innovation and public administration systems was exacerbated following the parliamentary elections in 2010. None of the previous key national or regional organizations could retain its status or autonomy. Following the elections, the National Office for Research and Technology (renamed to ‘National Innovation Office’) responsible for managing the allocation of funding from the Research and Technological Innovation Fund (RTIF) was hollowed out, and the majority of the experts fired. The implementation of innovation-related programmes was frozen: new calls for proposals were not announced for a period of more than a year. The existing contracts (that had been signed under the period of the previous government) underwent a lengthy review process. Payment of contracted support was frozen or waived. Finally, as of 2012, responsibility for the management of funding from RTIF was transferred to the National Development Agency. Responsibility of the hollowed out National Innovation Office was restricted to managing international relations in the field of technological and research collaborations; analysis of international technological trends; and provision of consultancy services to innovative SMEs.The National Development Agency, responsible for managing among others the innovation related OPs became subordinated to a newly established ministry: the Ministry of National Development. Shortly thereafter, the Agency was transferred under the authority of the Prime Minister’s Office (government decree 273/2013). Half a year later, the National Development Agency was dissolved (government decree 475/2013). Responsibility for the management and implementation of the individual OPs was dispersed and transferred to various ministries: to the Prime Minister’s Office, to the Ministry for National Economy, Ministry of National Development, and Ministry of Human Resources. Responsibility for the management of the Research and Technological Innovation Fund was transferred from the dissolved National Development Agency to the Ministry for National Economy. Following the 2014 elections the previously hollowed out National Innovation Office was reborn like phoenix from ashes: the authority of the management of RTIF was transferred to the renamed organisation (its new name was the National Research, Development and Innovation Office). Under a new president, (previously: government commissioner for research, development and innovation) the new Office, subordinated to the Prime Minister’s Office, became also responsible for the management of the Hungarian Scientific


Research Fund (OTKA) managed previously by independent committees, and supervised by the Hungarian Academy of Sciences. The institutional chaos caused by the subversion of each element in the innovation system at each spatial level has obviously hindered the absorption of EU Structural and Cohesion Funds. According to the data of the Regional Innovation Scoreboard, 2014, Hungary was found to have the lowest absorption rates of SF funding under RTDI priorities (p. 30), which is explained by institutional instability and frozen / waived programmes. This was the pretext of a further centralisation move, implying the creation of the National Development Steering Committee (NDSC). NDSC has four members: it is led by the Prime Minister and its members are the minister for national development, the minister of the economy and the state secretary in charge of the Prime Minister’s Office. Government decree 140/2012 transferred the authority of deciding upon large-scale developmental projects and all innovation related programmes to NDSC. Note that by that time the Managing Authorities of the OPs have also become subordinated to the ministries steered by NDSC-members.This was the institutional context of Hungary’s entering the Programming Period of 2014–2020. In this period, two main institutions will manage and decide upon the project applications of West Transdanubian innovative stakeholders: the Ministry for National Economy that manages the Economic Development and Innovation Operational Programme (final decision is made by NDSC) and the National Research, Development and Innovation Office that manages the funding of scientific research projects.As this analysis makes it obvious, there are no regionally decentralised resources aligned with West Transdanubian specifics, outlined in the regional innovation strategies. Although in principle, the Territorial and Settlement Development Operational Programme (TOP) is the continuation of the Regional Development OPs15 it does not address regional innovation issues. The only innovation-specific component of TOP is ‘support to the development of industrial parks and incubators’. The centralisation of the territorial development and regional innovation systems reached a tipping point16 just at the time of the official reform of EU Cohesion Policy that prescribed the incorporation of smart specialisation in national and regional innovation and development strategies. This coincidence is important, since smart specialization is closely related to the concept of partnership, empowerment of local stakeholders, decentralization and bottom-up approaches – given its strong reliance on local competitive strengths, the identification of which requires the involvement of local stakeholders. It is therefore obvious that the concentration of power that characterises the Hungarian system contradicts all elements of the smart specialization concept. Nevertheless, procedural compliance has been impeccable: Hungarian RIAs, including Pannon Novum RIA prepared the RIS3 strategies in an exemplary, participative manner: draft strategies were disseminated at regional and national stakeholders’ websites, and comments were invited. Similarly to the practice in other regions, a workshop was organized in West Transdanubia with approximately hundred invited stakeholders and experts, who were asked to discuss and comment on the draft RIS3 document. While programming (strategy drafting) has been accomplished in full compliance with EU principles and prescriptions, this exercise is formalistic, since strategy design has no influence on implementation. The


content of the calls for tender is uniform across regions: innovation support is financed from OPs that do not follow a territorial logic. In summary, the two phases of the policy cycle (policy design and implementation) are completely separated: regionally prepared strategies are irrelevant from the point of view of the content of calls for projects. Policy design takes place at the regional level in a manner, but implementation is centralised. Against this background, the exemplary procedures of RIS3 related activities such as planning, programming, participative policy design – can be considered only façade regionalism, façade smart specialization.

2.3 Regional innovation policy mixCurrently there are several strategies in place in West Transdanubia. The long-term regional innovation strategy (RIS Navigator) was launched in 2011, and updated in 2013, when WT’s RIS3 was prepared. Marking the ideological turn of the new government (according to which counties are the main units of territorial development and not regions) three county-level strategies were also prepared in 2014. The targeted sectors the innovation potential of which WT’s RIS3 envisages to improve include automotive, mechatronics, eco-industries, creative industries (e.g. design) and ICT. Additional targeted industries are tourism, wood and furniture industry, logistics and transportation. Nevertheless, as outlined earlier, region-level or country-level strategies do not influence the content of the calls: the actual calls for projects are drafted centrally. In April, 2016, for example, the government announced that the Economic Development and Innovation OP will consider food industry a specially targeted industry and therefore €333.3m will be earmarked from the funding available from this OP to support the food industry. In the current programming period, the main source of support is the Economic Development and Innovation OP, and the main form of funding is through grants. The composition of the measures is not expected to change considerably, compared to the prior financial perspective. New components of the OP include the increased emphasis on SMEs and on innovation; the elimination of the obligation to increase employment in the case of selected measures that support SMEs’ investment in technology development; the emergence of new objectives (industry 4.0 related objectives, the increase of SMEs’ export potential, support to suppliers’ integration in MNCs’ value chains). Similarly to the prior development period, innovation-related support measures will mainly address economic development (support will be granted mainly to market-oriented innovation undertakings) and not grand societal challenges. Table 1 summarises the most recent innovation policy measures launched in the new programming period.Table 1 Regional innovation support measuresTitle Durat

ionPolicy priorities

Budget*

Organisation responsible

More information


Higher Education and Industry Cooperation Centre ‒ Development of Research Infrastructure

2015-2018

1.3

2.1

€83m

Ministry for National Economy

https://www.palyazat.gov.hu/ginop-234-15-felsoktatsi-s-ipari-egyttmkdsi-kzpont-kutatsi-infrastruktra-fejlesztse

Support to companies’ RDI activities

2015-2018

4.1 €167m


https://www.palyazat.gov.hu/doc/4500

Development of prototypes, new products, technology and services

2014-2017

4.1

2.4€66.7m



Investment in research infrastructure, internationalisation and networking

2014-2019

1.3

7.3

€66.7m



Excellence of Strategic R&D Workshops

2013- 2019

1.2

3.5

€133m



Establishment of a consultancy & mentoring network to promote the internationalisation of ICT start-up firms

2016-2019

4.3

5.4

€8.3m


https://www.palyazat.gov.hu/ginop-313-15-ikt-startup-cgek-nemzetkzi-piacra-lpst-segt-szakrti-mentori-hlzat-kialaktsa

Innovation voucher

2016-2019

2.1

4.2

5.4

€10m


https://www.palyazat.gov.hu/ginop-214-15-innovcis-voucher

Industrial Property Rights

2015-2017

4.4

5.4

€3.3m



Building an innovation ecosystem: start-ups and spinoffs

2016-2019

4.3

5.2

5.5

€16.7m


https://www.palyazat.gov.hu/node/57221

R&D: Contracts of Competitiveness and Excellence

2014-2019

1.2

2.1

4.1

€24m

National Research, Development



and Innovation Office

* = Budget applies to all convergence regions, not only to West Transdanubia. If the budget foreseen for the given measure is equally distributed, the share of WT is one sixth of the stated amount. However, WT’s absorption capability is usually lower than that of other regions.

2.4 Appraisal of regional innovation policiesAs outlined previously, two factors need to be considered when evaluating regional innovation policy. The first one is the separation of strategy and its implementation: strategic documents are irrelevant from the point of view of the content of support measures. Consequently the well-documented thesis that different regions face different industrial and innovation policy challenges (Reid, 2011) is not recognised in Hungary. Developmental interventions do not address region-specific priorities, and policies are not tailored to the regional context. The second factor that tries to compensate for this deficiency is that innovation support measures are broadly formulated to allow for regional specifics to be taken into account. Regional stakeholders are expected to prepare project applications that are aligned with the region’s endowments. According to an optimistic scenario, domestic actors will be pulled by the ‘engine’ of flagship MNCs’ local subsidiaries, whereas local subsidiaries will be pulled by the strategic considerations of their parent companies that, in turn, rely on up-to-date technology intelligence processes (Lichtenthaler, 2004). Hence, developmental interventions will reinforce regional endowments, enable adaptation to technological change, reduce local actors’ distance to the technology frontier, enhance collaboration among actors, and contribute to the establishment of additional intra- and inter-regional linkages.This reasoning can, in principle, be interpreted as a textbook-type liberal market economy logic. In reality, however, that there is no such reasoning behind the practice of the allocation of EU Structural and Cohesion Funds. Instead of ideological considerations policy practice is driven by two (contradictory) forces: by vested interests (Magyar, 2013) and by a quest of the government to comply with European requirements and do not jeopardise the flow of funding arriving from EU Structural and Cohesion Funds. At the same time, the official policy rationale of the individual measures is impeccably formulated, in a 100% manner.This is the context in which the innovation policy measures listed in table 1 need to be evaluated. The first conspicuous feature of these measures is that most of them target business development (in particular, they support investment in technology development). Support is provided in the form of non-refundable grants. Funding is project-based, and provided on a competitive basis, but it relies dominantly on EU Structural Funds (national funding flows are dwarfed compared to the amounts allocated from EU Structural Funds for innovation purposes). An apparent priority within the current policy mix is the development of research infrastructure. Substantial funding is allocated to universities that finances their procurement of expensive and sophisticated research infrastructure. Industry–university collaboration is fostered mainly through this channel.A further important feature is that support measures are diversified, and target practically all stages of the innovation cycle. Policy practice is no


more characterised by exclusive science-push considerations, demand-pull components have been also incorporated in the policy mix, and relatively more emphasis is laid on the commercialisation and the uptake of research results. Considered from the perspective of the West Transdanubian region, it can be maintained that these broad-based national support measures match the factual needs of the region: innovative regional stakeholders can prepare project applications tailored to their own needs, that can, at the same time, be formulated to fit the broad description of the purposes of the given support measure. Conversely, it can also be asserted that this policy delivery mechanism ensures complete synergy between the national and the regional level – albeit in an overly simplistic form that hollows out the concept of regionalisation.However, the above-outlined association of this policy mechanism with economic liberalism can be observed in the distribution of the beneficiaries. Within West Transdanubia, there have always been considerable intra-regional disparities in terms of economic actors’ development level and innovation potential. Győr-Moson-Sopron (hereafter Győr) county is the most, and Zala county the least developed. In 2005, GDP per capita in Győr was 126.1% of the one of the sparsely populated Zala county. By 2014 GDP per capita increased considerably in both counties, albeit at a much more rapid pace in Győr (Figure 3). Divergence increased despite a decline in the population (the denominator) in Zala and rapid population growth in Győr. In 2005, population in Győr was by 49% higher than in Zala, and in 2014: by 62% higher. Increasing intra-regional disparities can be explained by the ‘perverse’ distribution of funding. Over the period between 2007 and 2013 Győr was allocated more than 2.5 times as much funding for economic development than to Zala. Regarding strictly RTDI-related funding, this indicator was 5.6: €51.7m to Győr versus €9.3m to Zala (Source: Colosseum, 2015, pp. 21-22).17

Figure 3

2005 2006 2007 2008 2009 2010 2011 2012 2013 20147

8

9

10

11

12

13

14

GDP per capita in WT's counties (€m)

Győr Vas Zala WT

Source: Central Statistical OfficeIn summary, while developmental interventions have obviously contributed to regional growth and development, they have, at the same time, resulted


in increased intra-regional disparities: in intra-regional divergence instead of convergence.The appraisal of regional innovation policies cannot be complete without listing the missing components of the policy mix. Considering the necessary caveat, that in early 2016, there are several upcoming support measures, i.e. the list in table 1 is not complete yet, one remark can already be made at this stage. The most important deficiency is the lack of specific sectoral and technological targets that could signal regional stakeholders the region-specific policy priorities. As for policy evaluations, this exercise is underdeveloped in Hungary. Existing evaluations focus on output and process-type indicators, and not on impact and outcome. Evaluations are prepared at the national, and not at the regional level. Regional innovation agencies try to monitor the outcome of selected supported innovation initiatives, but their monitoring results in tacit knowledge: no formal reports are prepared. At the national level, only aggregate evaluations are available on the absorption of funding, and the resulting overall change in selected indicators, along broad thematic priorities. Most of the evaluations were prepared in 2012 and 201318 (see review by Hétfa, 2015).A few new evaluations are also available. Noteworthy among them is the one of the State Audit Office of Hungary: it provides a summary evaluation on the absorption of EU Structural and Cohesion Funds and the resulting changes in selected performance indicators, over the period between 2007 and 2013 (ÁSZ, 2015). The Regional Operational Programme of WT was the smallest of all convergence regions, amounting to ~€500m (the average of the convergence regions was ~€780m). According to the calculations published in ÁSZ (2015, p.61) GDP per capita in WT was by 1.9% lower than the national average in 2007. By 2012 this indicator was by 1.4% higher than the national average. Another relevant finding concerns the (national-level) impact of the Economic Development Operational Programme (part of this OP supported RDI activities). According to ÁSZ (2015), compared to 2005, business enterprises’ investment in R&D has more than doubled by 2012 and the number of R&D employees increased by more than 60% over this period (numbers refer to national-level indicators). Another noteworthy opinion is the criticism raised by Kállay (2015). The author warns that government decree 1600/2012 prescribes that in the programming period of 2014 and 2020, 60% of the total funding available from EU Structural Funds is to be allocated to direct economic development purposes. In the previous programming period, this share was only 24% and the beneficial economic impact of even that amount was far inferior to expectations. This high share of funding available for direct economic development purposes will further increase the pressure for absorption the highest possible share of the available funding. Given the well-known trade-off between Structural Funds absorption and policy effectiveness, this latter indicator is expected to deteriorate.

2.5 Policy good practiceThis section will present the case study of the West Pannon Centre for Automotive and Mechatronics (WPCAM) that still needs to evolve to become a real good practice example. Nevertheless, its evolution so far makes it an interesting case, and highly relevant for other regions. It demonstrates that local initiative taking, bottom-up networking and strategy building activities can achieve great results even at the time of hollowed-out regionalism.


There are two factors to be mentioned as the context of WPCAM’s establishment. The first one is the policy instrument chosen as good practice: the launching of dedicated support measures that promote the representatives (in particular SMEs) of specially targeted industries and specially targeted geographical areas. These support measures are foreseen to be launched in the framework of the Economic Development and Innovation OP, during the 2014 – 2020 programming period. The eligible beneficiaries of these measures will be member companies of officially recognised ‘Special Zones’ or ‘Special Centres’ (e.g. in automotive industry).The second contextual factor is the agglomeration of automotive industry and the concentration of the representatives of various supplier industries (machinery, electronics, metal processing) in West Transdanubia. This agglomeration is obvious not only in Győr county, but also in Vas and Zala counties. However, partly because of the relatively higher development level of Győr, partly because of the presence of a flagship company (Audi) and a powerful university (Széchenyi University), and perhaps also partly because of Győr stakeholders’ better PR activity, the concept of ‘automotive centre’ is associated mainly with Győr, rather than with other regions within West Transdanubia — irrespective of the fact that Vas county, for example, also hosts a flagship automotive company (Opel Szentgotthárd) as well as subsidiaries of other blue chip MNCs (Delphi Hungary, LUK Savaria).Regional (NUTS3-level) policy decision-makers, together with representatives of firms, educational institutions and NGOs recognised this deficiency, and tried to institutionalise the economic potential of the local agglomeration in Vas and Zala counties. In the programming period of 2007–2013, accredited innovation clusters (AICs) were recognised as institutions that need to be promoted through dedicated support measures (as outlined earlier, substantial part of innovation-related funding was earmarked to AICs). However, West Transdanubia has no automotive-related AICs. Another institutionalisation possibility was the example of the Automotive Centre of Kecskemét (South Great Plain) that hosts Mercedes Benz’s production facility. The location of Mercedes’s production facility reinforced the prior clustering tendencies in this region. Kecskemét was recognised by a government decree, as a ‘Special Automotive Centre’ (an automotive growth pole) in summer, 2012. In the current programming period, investment projects of special automotive centres are considered as top government priority. Similarly to AICs in the previous programming period, Special Automotive Centres will become the institutions that need to be promoted through dedicated support measures between 2014 and 2020 (AICs will not lose their previous priority status either). Representatives of Vas and Zala counties were aware of the systematic networking and lobbying activity, coordinated by AIPA Nonprofit Public Benefit Ltd. that took place in the Kecskemét region before local stakeholders achieved this priority status. In an effort to do something similar, on the basis of an existing agglomeration, WPCAM was established, comprising a large number of actors in Vas and Zala counties. WPCAM’s mission is to improve business climate in the region, foster growth, employment, internationalisation and welfare, improve local FDI attraction potential, and initiate projects that enhance members’ competitiveness and regional commitment.Representatives of WPCAM engaged in a systematic expansion of the network and set up several taskforces that embarked on strategy


development. The WPCAM network expanded rapidly, including business enterprises, municipal authorities of cities with county right (Szombathely, Szentgotthárd, Zalaegerszeg, Nagykanizsa), secondary and tertiary educational institutions, chamber of industry and commerce, industry associations and various other NGOs. Strategy building started with information gathering on firms’ investment needs, planned upgrading moves and R&D activities. Information was gathered about various problems perceived by the stakeholders of these two counties. Taskforces developed background documents on issues including vocational education, higher education, R&D, regional development, infrastructure development, logistics, supplier integration, and entrepreneurship development. Strategy kept being refined in a bottom-up planning and programming process: new issues have been identified, new working groups were set-up, and additional stakeholders joined the network and provided their expertise. A ‘large companies’ taskforce, a ‘PR and communication’ taskforce and a ‘resources allocation’ taskforce have also been established. These working groups met on a monthly basis to develop strategy, and gather project ideas. Corporate stakeholders have soon made it clear that although they could in principle convince their parent companies to locate some minor or more important R&D projects to the Hungarian facility and/or expand the local production and initiate related technology investment projects if some dedicated public funding supported these initiatives, but there is a non-negligible obstacle that needs to be overcome first of all. The shortage of adequately skilled workforce has become so pressing in the region that it represents a serious bottleneck and hinders all kind of expansion. This problem needs to be addressed before any major or smaller-scale development projects are initiated.The first tangible achievements of WPCAM are related to projects aiming to solve this problem. The University of West Hungary as a consortium leader was granted €2.5m to develop regional higher education and enhance the dual education system. In 2015, a further €1.28m-project supported the enhancement of automotive mechanical engineering tertiary education in Szombathely.Meanwhile WPCAM has become a large and respectable organisation, comprising the municipalities of four cities with county rights, more than ten NGOs, nearly dozen educational institutions, 42 companies and a number of collaborating partners. In December 2012 WPCAM was officially recognised as a Special Automotive Centre (government decree 1667/2012), entitled to apply for dedicated support measures in the programming period between 2014 and 2020.Although the support instrument dedicated to foster activities and projects in special automotive centres was not announced yet at the time this report was drafted, the benefit of WPCAM’s establishment is already clear. In an effort to be able to initiate projects that are aligned with upcoming policy instruments, systematic networking, planning and project preparation started in the region. A professional strategy has been developed that relies on stakeholders’ factual needs. Systematic lobbying activity made this network recognised by national policy-makers. Preparatory processes concerned not only strategy development and project generation, but enhanced emphasis was laid also on human capital development: a key requirement of any future development projects.


2.6 Possible future orientations and opportunities Interviews with West Transdanubian regional innovation policy stakeholders confirmed that the era of regionalism, for example, of regional innovation policy-making, is over in Hungary. NUTS2 regions are not the basic units of territorial development any more, they are simple statistical units. Regionalism exists only as a façade exercise: smart specialisation strategy development is carried out at a regional level, in order to comply with the ex-ante conditionality of receiving funding from EU Structural Funds. In reality this exercise has no relevance on strategy implementation. Most of the regional institutions had been dissolved, including regional development council and agencies, regional innovation councils. Regional innovation agencies became for-profit innovation intermediaries without any authority. Regional stakeholders are marginalised. Although NUTS3-level counties with elected self-governments are in place, they are devoid of power. Consequently, it is fair to claim that meso-level governance does not exist in Hungary.Policy implementation is centralised: coordinated and administered by national level organisations, while real decision-making power on the allocation of development and innovation funding is retained in the authority of a couple of persons. Consequently, presenting future orientations and opportunities for the region’s innovation policy can be considered a façade exercise, similar to RIS3 drafting. These caveats notwithstanding, based on the considerations and options mentioned in the existing policy documents, and/or evident from stakeholder interviews, the following opportunities emerge as highly relevant for the future development of West Transdanubia’s innovation system. Promoting SMEs’ integration in MNC subsidiaries’ value chains

as suppliersFlagship MNCs’ local subsidiaries can be considered not only the main engine of regional growth but also the key drivers of regional industrial upgrading and innovation and new technology-based modernisation. Most SMEs find it very difficult to meet MNCs’ tangible and intangible requirements that are indispensable to become their suppliers. SMEs’ support in this respect promises good return, since MNCs keep ‘pushing’ their suppliers ahead, along a technological modernisation trajectory. Moreover, suppliers are increasingly expected to be engaged in collaborative RTDI activities and carry out continuous process enhancement. Providing support to supplier integration programmes, or to collaborative innovation undertakings between supplier firms and their integrator companies is a good opportunity that enables the region’s switching to an innovation-driven growth trajectory. An additional policy rationality is that this measure is bound to create strong incentives for private investment in technology development. Promoting SMEs’ internationalisation International market access is considered by an order of magnitude more difficult for SMEs than access to domestic markets (Svetlicic et al., 2007; Gubik, 2011). Since internationalisation is found to be closely associated with companies’ above-the-average growth and productivity performance, and with above-the-average innovation potential (e.g. Cassiman and Golovko, 2011; Love and Roper, 2015), future opportunities for the region


lie in the launching of dedicated support instruments that foster SMEs’ (and in particular innovation- or new technology-based SMEs’) internationalisation. This is recognised by Hungary’s national-level strategy, since one explicit purpose of the Economic Development and Innovation Operational Programme is to increase the share of export-oriented SMEs, and improve SME competences to enable them to enter international markets. This is especially relevant for West Transdanubian companies that have managed to become suppliers of MNCs’ local subsidiaries, and have thus moved ahead along a complex development trajectory. Internationalisation is the best way of reducing their dependence on one single, or on a couple of customers and diversifying their customer base.There are already a number of measures in place that support SMEs’ exporting, including dedicated financing schemes, innovation vouchers that can be used to purchase coaching and mentoring services; or grants that support SMEs’ participation in international trade fairs and in other events that facilitate SMEs’ identifying potential business partners. Enhanced policy emphasis on SMEs’ access to international markets and the diversification of the related policy mix are expected to display good return on public funding. To expand the number of SMEs that are able to export policy should combine the provision of up-to-date market-insight with awareness increasing campaigns. Target groups need to overcome not only information barriers: support in the form of provision of language and managerial courses, and the provision of extended financing and insurance solutions for existing and potential exporters would also prove highly useful for them. In order to ensure that export promotion packages become an important future opportunity for regional stakeholders, they need to be combined with awareness increasing campaigns and training programmes on the design-based drivers of entry in new markets. Promoting knowledge-intensive business services providersPartly because of WT’s strong specialisation in manufacturing industries and because of the non-negligible upgrading achieved in this sector, the activities of regional (private) knowledge-intensive services providers (engineering firms, contract research and technology solutions providers) have not received due policy emphasis yet. However, their role is very important in West Transdanubia, since they contribute both to the reinforcement of intra-regional business linkages and to knowledge-driven regional development. Moreover, industry 4.0 solutions providers (among them industrial automation firms and research and technology development services providers) can more easily be plugged into local MNC subsidiaries’ value chains than component suppliers. Setting up dedicated measures that foster these firms’ collaboration with the region’s manufacturing enterprises is therefore regarded as a promising opportunity enabling the increase of both the region’s value added to sales ratio and the value capture of the region’s enterprises.


Appendix A Bibliography

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3. ÁSZ (2015) Study on EU Structural and Cohesion Funds available for Hungary over the period between 2007 and 2013: absorption and evaluation. Available at: https://www.asz.hu/storage/files/files/Publikaciok/Elemzesek_tanulmanyok/2015/2007_2013_eu_koltsegvetesi_idoszakban_magyarorszag_reszere_juttatott_kozossegi_tamogatasok_osszefoglalo_bemutatasa_ertekelese.pdf?download=true

4. Baldwin, R.E. (2012) Global Supply Chains: Why They Emerged, Why They Matter, and Where They are Going. CEPR Discussion Paper No. DP9103. Available at SSRN: http://ssrn.com/abstract=2153484

5. Birkinshaw, J., & Hood, N. (1998) Multinational subsidiary evolution: Capability and charter change in foreign-owned subsidiary companies. Academy of Management Review, 23(4), 773-795.

6. Brynjolfsson, E., & McAfee, A. (2014) The second machine age: work, progress, and prosperity in a time of brilliant technologies. WW Norton & Company.

7. Cassiman, B., & Golovko, E. (2011) Innovation and internationalization through exports. Journal of International Business Studies, 42(1), 56-75.

8. Colosseum (2015) Cluster study 2015 [Klasztertanulmány 2015] Available at: http://klaszterfejlesztes.hu/content.php?cid=cont_56cd817b785216.80465373

9. Dalziel, M., & Parjanen, S. (2012) Measuring the impact of innovation intermediaries: A case study of Tekes. In Melkas, H., & Harmaakorpi, V. (Eds.): Practice-Based Innovation: Insights, Applications and Policy Implications. Berlin, Heidelberg: Springer, pp. 117-132. Available at: https://www.researchgate.net/profile/Satu_Parjanen/publication/226565895_Measuring_the_Impact_of_Innovation_Intermediaries_A_Case_Study_of_Tekes/links/00b4953428913e8b26000000.pdf

10. Etzkowitz, H., Webster, A., Gebhardt, C., & Terra, B. R. C. (2000) The future of the university and the university of the future: evolution of ivory tower to entrepreneurial paradigm. Research Policy, 29(2), 313-330.

11. EURegion (2015) EU-Régió számokban. EURegion in Zahlen. EURegio West Pannonia. Eisenstadt, Győr Szombathely Zalaegerszeg: KSH Available at: http://www.ksh.hu/docs/hun/xftp/idoszaki/regiok/eu_regio_2015.pdf

12. Feldman, M. P. (2000) Location and innovation: the new economic geography of innovation, spillovers, and agglomeration. In: Clark, G.L., Feldman, M.P., & Gertler, M.S. (Eds.) The Oxford Handbook of Economic Geography, Oxford: OUP, pp. 373-395.


http://ssrn.com/abstract=2153484

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13. Galambos, P., Csapó, Á., Zentay, P., Fülöp, I. M., Haidegger, T., Baranyi, P., & Rudas, I. J. (2015) Design, programming and orchestration of heterogeneous manufacturing systems through VR-powered remote collaboration. Robotics and Computer-Integrated Manufacturing, 33, 68-77.

14. Goldin, C. D., & Katz, L. F. (2008) The race between education and technology. Boston: Harvard University Press.

15. Gubik, A. S. (2011) A comparison of experts' and entrepreneurs' opinions on international business activity. Theory, Methodology, Practice, 7(2), 47.

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17. Kállay, L. (2015) Corruption risks in Hungary, associated with EU Structural Funds. [Az Uniós Források Korrupciós Kockázata Magyarországon] Transparency International, Available at: http://transparency.hu/uploads/docs/unios_forrasok_WEB_jav.pdf

18. Komlósi, É., Szerb, L., Ács, Z. J., & Ortega-Argilés, R. (2015) Quality-related regional differences in entrepreneurship based on the GEDI methodology: The case of Hungary. Acta Oeconomica, 65(3), 455-477.

19. Lichtenthaler, E. (2004) Technology intelligence processes in leading European and North American multinationals. R&D Management, 34(2), 121-135.

20. Love, J. H., & Roper, S. (2015) SME innovation, exporting and growth: A review of existing evidence. International Small Business Journal, 33(1), 28-48.

21. Magyar, B. (2013) Magyar Polip: A Posztkommunista Maffiaállam. [Hungarian Polyp: The Post-Communist Mafia State]. In: Magyar, B., & ., & Vásárhelyi, J. (Eds.) [Hungarian Polyp: The Post-Communist Mafia State] Budapest, Noran Libro, pp. 9-85.

22. McKinsey (2016) Industry 4.0 after the initial hype: Where manufacturers are finding value and how they can best capture it. Available at: https://www.mckinsey.de/sites/mck_files/files/mckinsey_industry_40_2016.pdf

23. Pálné Kovács, I. (2015) AER Study on the state of regionalism in Europe: Country report on Hungary. Available at: http://www.regscience.hu:8080/xmlui/bitstream/handle/11155/871/palne_aer_2015.pdf?sequence=1

24. Porter, M. E. (1990) The competitive advantage of nations. New York: Free Press

25. Porter, M. E., & Heppelmann, J. E. (2014) How smart, connected products are transforming competition. Harvard Business Review, 92(11), 64-88.

26. Reid, A (2011) EU innovation policy: one size does not fit all! In: Radosevic, S., & Kaderábková, A. (Eds.). Challenges for European Innovation Policy: Cohesion and Excellence from a Schumpeterian Perspective. Edward Elgar Publishing., pp. 112-149.


27. Sass, M. (2013) Case Study Evidence of the Extent and Nature of Foreign Subsidiaries’ R&D and Innovation Capability in Hungary. Grincoh Working Papers, No. 2.11. Available at: http://www.grincoh.eu/media/serie_2_international_economic_relations/grincoh_wp2.11_sass.pdf

28. Svetličič, M., Jaklič, A., & Burger, A. (2007) Internationalization of small and medium-size enterprises from selected central European economies. Eastern European Economics, 45(4), 36-65.

29. Szalavetz, A. (2015) Regional Innovation Policy in Hungary – The Regionalism Façade, or the Limitations of Achieving Good Governance through Europeanization. Journal of Comparative Economic Studies, Volume 10, March, pp. 159-182. Available at: http://www.ces.kier.kyoto-u.ac.jp/jces_10.html

30. Viharos, Zs. J., Paniti, I., Farkas, J. (2015) Beállási idők előrejelzése polimerek forgácsolásánál. (Forecast of changeover and set-up times for polymer cutting). Available at: http://www.sztaki.hu/~viharos/homepage/Publications/2015/Gyartas_2015/viharos_paniti_farkas_gyartas2015cikk_FINAL.pdf


http://www.sztaki.hu/~viharos/homepage/Publications/2015/Gyartas_2015/viharos_paniti_farkas_gyartas2015cikk_FINAL.pdf

http://www.sztaki.hu/~viharos/homepage/Publications/2015/Gyartas_2015/viharos_paniti_farkas_gyartas2015cikk_FINAL.pdf

Appendix B Stakeholders consulted

1. Lajos BABICS, Jankovits Hidraulika Ltd. (22/04/2016)2. Gábor BELSŐ, CEO, Europtec Ltd. (05/05/2016). 3. Róbert CSONTOS, Engineering manager, iQor Global Services

Hungary (04/05/2016) 4. Balázs ERŐS, SMT Manufacturing Engineering Competency Leader,

Delphi Hungary (04/05/2016). 5. Zoltán FARSANG, Pannon Novum RIA (04/05/2016) 6. András HÁRY, CEO, Technológiai Centrum (05/05/2016) 7. Zoltán NAGY, CEO 3B Hungária Ltd. (21/04/2016)8. Szilveszter SOÓS, Opel Szentgotthárd, (04/05/2016)9. Zsolt VIHAROS, senior research fellow, Institute for Computer Science

and Control of the Hungarian Academy of Sciences (SZTAKI), Laboratory on Engineering and Management Intelligence Organisation (18/04/2016)


technopolis |group| BelgiumAvenue de Tervuren 12B-1040 BrusselsBelgiumT +32 2 737 74 40F +32 2 727 74 49E [email protected]

1 Audi Hungária and Rába are both specialised primarily in complex automotive systems (are tier 1 suppliers), but at the same time they are original equipment manufacturers as well. Besides manufacturing engines, four of Audi models are also assembled in Győr: A3 Sedan, A3 Cabriolet, TT Coupé, and TT Roadster. Rába manufactures trucks, tractors, and the S91 midibus, though its main products are axles for medium and heavy duty trucks.2 Source: Author’s calculation from county level analyses of corporate financial report data carried out by the National Tax Authority. 3 Example of high-performing domestic companies include 3B Hungária (design and production of material conveying and processing systems), Borsodi Műhely (design and production of custom-made devices and production lines, machining), Jankovits Hidraulika (customised hydraulics systems and industrial automation solutions), Pylon 94 Ltd. (assemblies, sub-assemblies and parts of lifting devices, e.g. cranes).4 The activities of some national-level industry associations, such as the Hungarian Innovation Association, the Association of the Hungarian Automotive Industry, the Association of the Hungarian Vehicle Component Manufacturers and the Association of ICT and Electronics Firms are also strongly related to the activities of the region’s manufacturing actors: many of the surveyed companies are members in both regional and national associations.5 250 apprentices are currently being trained in 13 different metal-working and electrical occupations in Audi Hungária’s training centre. Since 2001, approximately 2,000 apprentices have completed a course of vocational training. (Source: Audi Media Centre: Audi Hungaria and the society. Available at: https://audi.hu/en/corporate-responsibility/audi-hungaria-and-the-society/6 The Techtogether event is organised by autopro.hu, Hungexpo (organiser of trade exhibition events) and the Association of the Hungarian Automotive Industry. Some companies from the West Transdanubian region are regular sponsors of this event. Examples include Audi Hungária, Nemak Győr, BPW Hungária, Schaeffler Group (Luk Savaria).7 For example, Audi co-financed the establishment of a laboratory for combustion engines at Széchenyi University where online attrition tests are performed (that test the tribological behaviour of engines).8 In Audi Hungaria’s body shop alone, there are more than 900 robots (Source: Fókuszban az Audi Hungária, 2015).9 One example is Opel Szentgotthárd. Opel uses coolants in machining to reduce heat caused by fast machining. “Engine manufacturers use coolants e.g. during the gear-teeth machining process, where the coolant fulfils a variety of functions, including dissipation of heat; friction reduction by washing away grinding abrasion and metal chips. Thus, coolants can also decrease grinding wheel wear and improve workpiece quality; prevent burning, and improve the reliability of overall production.” “Until recently, the plant was running central emulsion systems installed in 1996 to supply the machining lines with coolants. The pumps ran continuously, with excess emulsion recirculated back to the central system via a bypass line. Opel decided to replace the system and introduce intelligent coolant management technology. The bypass line was dismantled and a self-teaching control system was implemented. With the new approach, the plant is able to provide intelligent emulsion supply by taking into account a significant number of operation parameters. For instance, incorporated measurement devices follow the variation of the emulsion pressure in the different systems, while an algorithm adjusts the necessary level of intervention. The system is now able to maintain energy-efficient working processes using the adaptive power control of the emulsion supply pumps. As a result of the project, one of the existing central coolant system pumps at Opel Szentgotthárd could be disabled, allowing power demand to decrease by 270kWh. This allowed the plant to achieve a reduction in electricity consumption of 1,760MWh a year, equal to a cost saving of €184,000 ($202,000), which in turn corresponds to an annual 595-tonne reduction in CO2 emissions.” (Source: Fluid thinking in machining. Automotive Manufacturing Solutions, 03 June, 2015. Available at: http://www.automotivemanufacturingsolutions.com/technology/fluid-thinking10 There are two implicit references in this sentence, to two seminal books: Brynjolfsson and McAffee (2014) and Goldin and Katz (2008).11 Over the 2007 – 2013 period AIC-companies received support amounting to more than €700m, and one third of this support was allocated for investments in RTDI efforts. WT’s AIC-

companies received €46m, half of the average of €100. (Source: Colosseum, 2015, p. 19 and 21) 12 Source: Interview with the CEE Logistics and Supply Chain Management Award Winner - Industry Category. Available at: http://www.translogconnect.eu/2014/index.php?news=1013 See additional details about the ‘underreporting phenomenon’ in Sass, 2013.14 Komlósi et al. (2015) developed a regional-level entrepreneurship and development index (REDI) for the Hungarian regions, for three sub-indices (entrepreneurial attitudes, entrepreneurial abilities and entrepreneurial aspirations) and compared the calculated scores to 83 countries that participated in the 2011 Global Entrepreneurship and Development Index report. 15 In the Programming Period of 2007 – 2013 the Regional OPs were centrally managed: by the National Development Agency (after its dissolution by the Ministry for National Economy). The new distribution of OPs suggests the official recognition of centralisation, the end of regionalism: instead of the seven regional OPs of the prior programming period, in the current period there is only one programme: the Territorial and Settlement Development Operational Programme that ‘incorporates the development objectives of all regions’. 16 This paragraph and the subsequent ones in this section draw on the author’s paper Szalavetz (2015).17 The total amount allocated from EU Structural Funds to West Transdanubian corporate stakeholders’ RTDI efforts was €76.3m over the prior programming period (note that this amount is only part of the total amount allocated for RTDI purposes to the region). Colosseum (2015, p. 22) 18 The results of these evaluations are summarised in the previous regional report on West Transdanubia. Available at: https://ec.europa.eu/growth/tools-databases/regional-innovation-monitor/sites/default/files/report/2014_RIM%20Plus%20Regional%20Innovation%20Report_West%20Transdanubia.pdf

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