The Iron Curtain of Non-Innovativeness Has Been Breached

Innovativeness is a glamourized factor that is supposed to cure all the economic problems of the countries and the world. But do all countries need to be innovative to grow their economies?

/
Businessman pointing arrow graph corporate future growth plan
To keep the pace of growth and remain competitive despite not being the cheapest available, products and services from CEE will need to include some locally added value. In practical terms, that value equals locally conceived innovations. Photo: Monster Ztudio / stock.adobe.com

This year, many Central European countries celebrated 18 years of membership in the European Union. Becoming a cheap subsidiary in western chains of values helped those economies grow over the years. But as these Central European economies grew, so did local salaries.

Innovativeness and labor cost

This means that, sooner or later, Central European economies will lose their competitive edge based primarily on low labor costs. To keep the pace of growth and remain competitive despite not being the cheapest available, products and services from CEE will need to include some locally added value. In practical terms, that value equals locally conceived innovations.

So, where exactly are the respective Central European countries in that process? According to Eurostat, in all Central European countries except Croatia, labor costs grew over the years more dynamically than in the “Old EU” countries. Despite that growth, Central Europe still has a cost-based competitive advantage over Western Europe, as its labor costs are still way below those in the West, with Bulgaria and Romania having the lowest in the region.

On the other hand, Czechia, Slovenia, and Estonia have the highest labor costs in the CEE, which means they will be the first to need new competitive advantages to secure long-term growth.

One of the most commonly used statistic indicators regarding innovativeness is the share of the research and development (R&D) spending in the country’s gross domestic product. Eurostat’s figures confirm the previously mentioned intuition.

Central Europe is slowly but steadily catching up with Western Europe in that regard. Some countries such as Romania, Latvia, and Bulgaria lag behind others, while in Czechia, Estonia, and Slovenia, R&D expenditures make up about 2 percent of their GDP, which is already on par with some of the most developed economies on the continent

Chains of value

Statistics show that some Central European countries like Czechia, Slovenia, and Estonia are already facing a stage of economic development that pushes them towards creating their own chains of value based on their unique know-how in specific areas. On the other hand, countries like Romania and Bulgaria still have a margin for further economic development as subsidiaries within other’s chains of value.

The countries in between can, for the time being, continue to take advantage of their relatively low labor costs. However, they should already be on the lookout for other economic edges. In the longer term, all the countries will need to transform into innovative and technologically-focused economies, which means you can expect more and more innovation coming from Central Europe.

Szymon Wieczorek

Graduated in Economics from SGH Warsaw School of Economics and Universitat Autònoma de Barcelona. His professional interests cover various aspects of the economy and his particular strengths are statistics and econometrics. He is also one of the authors of the 3 Seas Europe newsletter. His personal interests are history, politics, biking and foreign languages.

Leave a Reply

Latest from Blog