Growth and competitiveness in Central, Eastern and South-Eastern Europe : the role of innovation.
Date: 2025-01-27
Institutions: European Investment Bank
Subjects: Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, accession to the European Union, competitiveness, economic growth, industry-research relations, innovation, investment, professional qualifications

ECONOMICS – WORKING PAPERS 2025/01

Growth and competitiveness  
in Central, Eastern  
and South-Eastern Europe:  
The role of innovation 
January 2025

Growth and competitiveness  
in Central, Eastern  
and South-Eastern Europe:  
The role of innovation
January 2025

Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation

© European Investment Bank, 2025.

EIB Working Paper 2025/01
January 2025

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ISSN 2599-736X

doi: 10.2867/4566543

Contents 

About this paper ................................................................................................................. v 

Executive Summary ........................................................................................................... vi 

Introduction ....................................................................................................................... 1 

Section I: Common elements .............................................................................................. 2 

1  The state of innovation in the CESEE region ................................................................... 2 

1.1  Overview ........................................................................................................................................  2 

1.2  Sectoral and geographical concentration of innovation ................................................................... 5 

1.3  Dispersion of innovation activities across firms ............................................................................... 7 

1.4  Public support for research, development, and innovation .............................................................. 9 

2  Challenges and opportunities ....................................................................................... 10 

2.1  Augmenting the role of foreign-owned firms in innovation ............................................................. 11 

2.2  Overcoming the shortage of skills .................................................................................................. 18 
2.2.1  Low public investments in R&D ................................................................................................................... 19 
2.2.2  Low corporate investment in continuous education ................................................................................... 19 
2.2.3  Brain drain ................................................................................................................................................... 20 
2.3  Transforming innovative ideas into marketable products  and services ........................................... 21 
2.3.1 
Joint research between businesses and higher education institutions ....................................................... 21 
2.3.2  The availability of risk financing in private markets ..................................................................................... 23 

3  Policy implications ....................................................................................................... 25 

Section II: Country Dashboards ......................................................................................... 28 
Bulgaria ................................................................................................................................................... 30 
Croatia .................................................................................................................................................... 31 
Czechia .................................................................................................................................................... 32 
Estonia .................................................................................................................................................... 33 
Hungary .................................................................................................................................................. 34 
Latvia ...................................................................................................................................................... 35 
Lithuania ................................................................................................................................................. 36 
Poland ..................................................................................................................................................... 37 
Romania .................................................................................................................................................. 38 
Slovakia ................................................................................................................................................... 39 
Slovenia .................................................................................................................................................. 40 

Annex: Construction of the dashboard indicators ............................................................. 41 

References........................................................................................................................ 45 

 
 
 
Abstract 
This  paper  examines  the  state  of  innovation  in  Central,  Eastern,  and  South-Eastern  EU  countries.  Despite 
increased 
its  growth  and 
competitiveness,  including  severe  skills  shortages,  uneven  productivity,  and  barriers  to  commercialising 
innovation.  

innovation  capacity,  the  region  faces  significant  challenges  threatening 

The paper highlights the role of foreign direct investment in driving innovation, noting that firms established 
through greenfield investments exhibit higher productivity than their domestic counterparts. Contributing to 
the skills shortage are low public R&D spending, insufficient corporate investment in continuing education, and 
emigration.  Limited  collaboration  between  universities  and businesses and  a  shortage  of  risk  capital  are  key 
obstacles to bringing innovative ideas to market.  

To  address  these  challenges,  the  paper  recommends  various  measures  to  improve  the  availability  of  skilled 
labour,  secure  risk  capital,  foster  collaboration  between  academia  and  industry,  and  enhance  the  overall 
business  environment.  Dashboards  illustrate  how  innovation  capacity  and  outcomes  vary  between  CESEE 
countries,  combining  data  from  the  EIB’s  Investment  Survey  with  a  range  of  firm-level  public  and  private 
datasets. 

Authors  
Matteo Ferrazzi, Jochen Schanz, and Marcin Wolski of the European Investment Bank. 

Acknowledgements 
The  overall  coordination  of  this  paper  on  innovation  activity  in  CESEE  was  led  by  Jochen  Schanz,  with 
contributions  from  Matteo  Ferrazzi  and  Marcin  Wolski,  economists  at  the  Economics  Department  of  the 
European Investment Bank. The authors would like to thank Francisca Guadagno, Doris Hanzl-Weiss (both wiiw), 
Tomas  Slacik  (OeNB),  Debora  Revoltella,  and  Christoph  Weiss  (both  EIB)  for  their  valuable  comments,  Julie 
Delanote (EIB) for her contribution of information on patents, Peter Harasztosi for his advice on ORBIS, and to 
Federico Bonfio for his research assistance. 

Keywords 
Innovation, competitiveness, EU-CESEE, CESEE, central, eastern and south-eastern Europe, economic growth, 
EU accession 

JEL classification: O11, O52 

 
About this paper 

This  paper  on  innovation  in  Central,  Eastern,  and  South-Eastern  EU  (CESEE)  was  developed  through  a 
collaboration among the Austrian National Bank (OeNB), the Vienna Institute for Economic Studies (wiiw), and 
the European Investment Bank (EIB). These institutions partnered on a broader study exploring competitiveness 
and  future drivers  of  economic  growth  in CESEE countries  that  are  EU  members:    Bulgaria,  Croatia,  Czechia, 
Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.  

As the EU as a whole assesses its economic competitiveness in the global context, CESEE countries also need to 
evaluate the sustainability of their economic convergence within the EU and the sectors, technologies, and skills 
that are likely to drive growth. Despite their varied levels of economic development and different economic 
structures, these countries share a common history of successful economic transition from centrally planned 
economies. On the whole, their economies have been considerably more dynamic than those in the rest of the 
EU. They have made notable progress in areas like digitalisation, decarbonisation, and supply chain resilience. 
However,  they  need  to  upgrade  their  production  capabilities  and  maintain  competitiveness  as  their  cost 
advantages decline to avoid the middle-income trap—where economies struggle to transition to high-income 
status  due  to  rising  costs  and  declining  competitiveness.  Accelerating  the  shift  toward  an  innovation-driven 
economy is essential for the region. 

The analysis is modular and comprises three papers, each focusing on different aspects: 

•  Sources  of  growth  and  productivity:  this  includes  an  analysis  of  productivity  trends  over  the  past  two 
decades, in “Will the CESEE region stay in the fast lane or (where) does its growth model need polishing?” 
(Slačík, 2024). 

•  Export structure and comparative advantages: this paper identifies promising sectors through analyses of 
export  evolution,  specialization,  and  growth  potentials  using  a  product  space  approach.  It  highlights 
promising products for specialization across CESEE countries, with findings published in the wiiw Forecast 
Papers (Guadagno, F., D. Hanzl-Weiss, and R. Stehrer, 2024). 
Innovation: This is the focus of the current paper

• 

The state of innovation in the CESEE region | v 

Executive Summary 

Central, Eastern, and South-Eastern Europe EU countries (CESEE) have made notable progress in enhancing their 
innovation  capacity  over  the  past  decade.  Businesses  have  doubled  their  R&D  personnel  and  increased 
investments in intellectual property. However, significant gaps remain that could hinder the region’s growth and 
competitiveness, especially as China, the US, and other parts of the EU have also invested more in innovation. 
The region faces a severe skills shortage, and while productivity growth has generally outpaced the North and 
West of the EU, recent trends show signs of deceleration. Strengthening innovation is essential for raising living 
standards, reducing reliance on industrial goods production, and enhancing competitiveness. 

In this paper, we review the state of innovation in the CESEE region of the EU, using its Northern and Western 
region  as  a  yardstick.  We highlight  common  developments  in  its  first  part  before  turning  to  country-specific 
characteristics.  

Across the CESEE region, innovation is largely concentrated in manufacturing, ICT, and pharmaceuticals, driven 
in part by foreign direct investment (Section 1.2). However, innovation activities are unevenly distributed across 
firms and geographies, with capital cities and regions with strong academic institutions leading the way.  

Labour productivity is more dispersed within economic sectors in CESEE than in the North and West of the EU, 
partly due to the higher proportion of small firms in CESEE economies (Section 1.3). Smaller firms typically face 
greater  challenges  in  accessing  finance  for  innovation,  leading  to  lower  productivity.  Lower  investments  in 
innovation result in weaker outcomes, with R&D spending in CESEE about half that of the North and West of the 
EU (Section 1.4). Technology transfers through FDI appear to help mitigate some of these differences. 

Addressing  the  region’s  innovation  challenges  requires  increasing  the  availability  of  skilled  labour,  securing 
adequate risk capital, and adopting cutting-edge technologies while improving the business environment. This 
paper focuses on three specific challenges, where the European Investment Bank’s annual corporate investment 
survey and its activity in the region helps us to provide insights: leveraging foreign direct investment, addressing 
the skills shortage, and facilitating the transformation of ideas into innovative products through collaboration 
and risk capital. 

Foreign-owned firms tend to be more innovative and productive than domestically owned ones, but much of 
this advantage appears due to the size, age, and sectoral differences between the two (Section 2.1). Greenfield 
investments  by  foreign  firms  have  the  most  significant  productivity  advantage,  while  firms  acquired  by 
foreigners were often already more productive, suggesting a “cherry-picking” effect. However, if only due to the 
large  presence  of  foreign-owned  firms,  FDI  is  set  to  continue  to  provide  a  source  of  finance  and  innovative 
technologies to the region. 

A  shortage  of  skilled  staff  is  a  major  obstacle  for  CESEE  companies,  driven  by  low  public  R&D  investment, 
inadequate lifelong learning opportunities, and emigration (Section 2.2). Spending on R&D in public and higher 
education is just over half the level of the North and West of the EU, and academic research quality indicators 
are similarly low. Emigration has slowed labour force growth and is likely to continue, driven by higher salaries, 
political  stability,  and  differences  in  mentality,  culture,  and  lifestyle.  This  suggest  that  emigration  could  be 
lowered through a broad range of policies, including investments in social infrastructure. 

The  final  challenge  is  the  commercialisation  of  research  findings  through  collaborative  research  and  risk 
financing (Section 2.3). Universities in the CESEE region cooperate less with businesses than their Western and 
Northern EU counterparts, partly due to bureaucratic hurdles and funding constraints. The lack of risk finance 
for commercialising research results is a significant issue, particularly for small companies. Development banks 
can play a vital role in addressing these challenges by substituting for absent private markets and supporting 
their development. 

In the second part of the paper, we present dashboards that offer an overview of country-specific innovation 
characteristics.  These  dashboards  include  summaries  of  growth  and  convergence,  showing  that  research-
intensive  sectors  are  among  those  that  contribute  significantly  to  GDP  growth  in  most  countries.  They  also 
feature indicators on the business and political environment, availability of skills and finance, and innovation 
outcomes.  The  dashboards  illustrate  that  countries  perform  quite  differently  across  different  dimensions  of 
innovation, with some exceeding the EU average while others risk falling behind. 

vi | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

Introduction 

There is no doubt that the competitiveness of the European Union's economy is under threat, including in its 
Central,  Eastern,  and  South-Eastern  (CESEE)  member  countries.  Economic  growth  in  the  EU  has  consistently 
lagged behind that of the United States and China. Meanwhile, per capita income in the US is still about one 
third higher than in the EU, while China's per capita income is rapidly catching up (Figure 1, left-hand panel). 
Lower productivity accounts for most of this gap (Draghi, 2024). Europe's missed IT revolution is likely to be an 
important factor (Schnabel, 2024). 

At first glance, the outlook for the EU's CESEE members (EU-CESEE) is less gloomy. While overall convergence in 
the EU has stalled, the CESEE region has caught up with its wealthier peers to the North and West of the EU (EU-
NW,  Figure  1a).  These  countries  have  modernised  their  economies  and  integrated  into  international  supply 
chains  with  the  help  of  foreign  direct  investment  (FDI).  EU  accession  in  the  2000s  provided  access  to  a 
prosperous export market, further accelerating technology transfer and driving institutional convergence. GDP 
convergence has been slower than GDP per capita convergence. This is because the population shrank in the 
CESEE region by around 10% to approximately 100 million in 2023. Meanwhile, the population in the North and 
West of the EU increased by just over 10%, reaching about 220 million in 2023. 

Figure 1a: Economic convergence of the EU (GDP 
per capita, PPS, % of EU) 

Figure 1b: Economic convergence of EU-CEESE 
towards the North and West of the EU (% of EU-
NW) 

150

120

90

60

30

0

75

60

45

30

15

0

1990

1995

2000

2005

2010

2015

2020

1990

1995

2000

2005

2010

2015

2020

US

China

GDP pc (PPS)

GDP

Source: Worldbank and Eurostat, authors’ calculations.  

Since 2010, however, the convergence of the CESEE region has lost steam (Slačík, 2024). FDI inflows, at 5.2% of 
GDP in the 2000s, slowed in the decade after the Global Financial Crisis to 2.4% of GDP on average. Energy and 
especially labour costs have risen. Amid net emigration and population ageing, a shortage of qualified staff has 
become  the  most  important  structural  obstacle  for  corporate  investment.  CESEE  countries  appear  at  risk  of 
falling into the middle-income trap (Zuk, Savelin, 2018; Győrffy, 2022; Stöllinger, 2019; Eichengreen et al. 2013).1  

In  order  to  stimulate  growth  and  convergence,  CESEE  countries  must  invest  in  knowledge-  and  technology-
intensive production (see, for example, Zavarská et al., 2023, 2024 and Guadagno, 2024). This transformation 
has started but remains patchy. Over the past decade, some of the largest contributions to GDP growth came 
from R&D-intensive sectors: Manufacturing, Professional, Scientific, and Technical Services, and ICT, suggesting 
that the region is well positioned for future growth (Figure 2, left panel). However, there are reasons to remain 
cautious.  First,  these  three  sectors  are  substantially  less  R&D  intensive  than  in  the  North  and  West 

1 

The middle income trap is a situation in which the initial advantages of a catching-up economy may disappear once a certain level of 
development is reached, typically when the labour costs advantages are eroded but the level of technological innovation cannot yet 
compete with the countries on the technological frontier. 

Introduction | 1 

 
 
                                                                 
(Figure 2, right  panel).  Moreover,  sectors  with  low  R&D  intensity  also  contributed  significantly  to  growth 
(Transport and Trade), mirroring the region’s increased integration in global value chain.  

Central and Eastern EU 

North and West EU 

)

%

(
h
t
w
o
r
g
P
D
G
o
t
n
o
i
t
u
b
i
r
t
n
o
C

10

8

6

4

2

0

-2

-2

Manufacturing 
(C)

Trade (G)

ICT (J)

Professional 
services (M)

N

Q

I

R

Transport (H)

Public sector (O-P)

K

A

F

B

S-U

D-E

)

%

(
h
t
w
o
r
g
P
D
G
o
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o
i
t
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r
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C

10

8

6

4

2

0

-2

-4

0

2

4

6

8

10

-2

N

Q

Public 
sector 
(O-P)

ICT (J)

Manufacturing 
(C)

Trade (G)

K

D-E

B

A

F
S-U
Transport (H)

Professional 
services (M)

2

4

6

8

10

I

0

R

R&D intensity (% of value added)

R&D intensity (% of value added)

Source:  Eurostat,  authors’  calculations.  Note:  The  width  of  the  bubbles  represents  their  share  in  value  added.  R&D  intensities  are 
averages over 2013-21 due to limited data availability. The sectors are coded as follows: A=Agriculture, B=Mining, D-E = Infrastructure, F 
= Construction, I = Accommodation and Food, K = Finance, N = Support services, Q = Health and social work, R = Recreation, S-U other 
services. 

Section I provides an overview of the current state of innovation across the region. Section II presents a set of 
indicators that assess the progress each individual country has made thus far and highlight remaining gaps.  

Section I: Common elements  

This section offers a broad overview of business innovation across the EU-CESEE region, albeit with a caveat: it 
largely glosses over the substantial disparities among its constituent countries. We illustrate these differences 
in  the  form  of  dashboards  in  Section  II.  That  said,  in  most  of  the  indicators  that  we  present,  the  wealthier 
economies of the region resemble the average economy in the North and West of the EU. 

Chapter 1 presents the key indicators we use to assess innovation. We then discuss sectoral and geographical 
differences in innovation, the wide range of innovation activities across firms, and public support for innovation. 
In Chapter 2 we pick out three of the challenges that the region faces: i) reaping the benefits of foreign direct 
investment and foreign ownership; ii) reducing the severe shortage of staff with the right skills; and iii) facilitating 
the transformation of ideas into innovative products and services. Chapter 3 presents policy recommendations.  

1  The state of innovation in the CESEE region 

1.1  Overview 
The CESEE region has increased its innovative capacity substantially over the past decade. Innovation, defined 
as the application of new ideas, products, or methods, is inherently challenging to quantify beyond survey-based 
measures. To provide a more comprehensive picture, we supplement these subjective indicators with “hard” 
metrics of innovation investment, such as research and development expenditures, and probable innovation 
outcomes, like productivity enhancements (Box 1). 

2 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
 
 
 
 
 
 
 
 
Businesses in CESEE are employing more than twice the number of R&D personnel than a decade earlier.2 Their 
share of investments dedicated to intellectual property has seen a gradual uptick, moving from  10% to 12% 
during the same period.3 Remarkably, at 2% per annum, labour productivity grew almost three times more than 
that in the North and West of the EU.4 

Moreover, businesses are gravitating towards higher value-added segments of production. In the manufacturing 
sector,  numerous  foreign  companies  are  relocating  product  development  to  the  region,  capitalizing  on  the 
skilled  workforce  and  their  relatively  lower  wages.  The  region  boasts  leading  players  in  sectors  such  as 
automotive, pharma, biotech, health, and ICT. Tech giants like Google and IBM have also established research 
centres in the region (Box 2). 

Box 1: Measuring innovation 

We define Innovation as the commercial use of new ideas, products or methods where they have not been 
used before.  

Innovation activity is typically gauged through surveys, accounting data such as an increase in intangible 
assets, or improved productivity. Each of these measures has its own set of advantages and disadvantages. 
Surveys (such as the EIB's Investment Survey or the EU's Community Innovation Survey) can provide a more 
comprehensive  overview  of  process  and  product  improvements  but  rely  on  interviewees’  subjective 
assessments. The accounting values of intangible assets include expenditures related to innovation, such as 
software,  databases,  and  patents,  but  also  items  unrelated  to  innovation,  such  as  goodwill  following 
acquisitions of firms. Patent applications are often submitted by teams of researchers working in different 
locations. Distributing the research activities that led to the patent across countries presents a challenge in 
particular for the CESEE economies, where an important part of corporate research is done by multinational 
corporations. 

Data on productivity is easier to come by but is partly influenced by factors that have nothing to do with 
innovation  (Hall,  2011).  For  example,  higher  capacity  utilisation  in  an  upswing  would  typically  increase 
measured  productivity  even  when  no  innovation  has  taken  place.  Productivity  is  often  measured  as  the 
quantities of goods or services that were produced per employee (labour productivity). In order to separate 
the  impact  of  higher  capital  intensity  from  that  of  innovation,  labour  productivity  growth  can  be 
decomposed  into  capital  deepening  (the  increase  in  capital  per  employee)  and  total  factor  productivity 
growth (TFP). While TFP growth captures innovation arguably better than labour productivity growth, there 
are conceptual issues in how to calculate it. We use both measures of labour productivity and TFP in this 
paper.  

Innovation can also be measured by its inputs: most commonly, expenditure on research and development 
(R&D).  The  terms  "research"  and  "development"  are  often  used  together,  especially  in  the  context  of 
corporate innovation, but they refer to distinct phases in the process of creating new products, services, or 
technologies.  Basic  research  aims  to  increase  understanding  of  fundamental  principles  while  applied 
research attempts to solve specific problems or developing new applications. Development aims to use the 
knowledge  gained  from  research  to  create  practical  applications,  products,  or  processes.  It  focused  on 
designing,  testing,  and  refining  new  products  or  services.  The  distinction  is  not  clear-cut  however,  in 
particular between applied research and experimental development. As a result, different statistical sources 
may report different estimates of R&D activities (OECD, 2015). 

2  
3  

4  

Source: Authors’ calculations based on Eurostat, comparing researchers and technicians in 2022 with those in 2012. 
Source: Authors’ calculations based on OECD National Accounts, comparing 2022 with 2012. Due to data limitations, the calculation 
omits BG, RO, and HR.   
Source: Authors’ calculations based on OECD Productivity Statistics, comparing GDP per hour worked in 2022 with 2012.  

Section I: Common elements | 3 

                                                                 
Box 2: Which top R&D spending firms are headquartered in the CESEE region?  

Firms in the CESEE region spend about half as much on R&D as a share of their value added than firms in the 
North  and  West  of  the  EU.  And  the  region  only  hosts  8  of  the  headquarters  of  the  EU’s  top  1000  R&D 
spending  firms:  their  activities  are  largely  in  pharmaceuticals  and  ICT,  typical  for  the  top  R&D  spending 
sectors  in  the  EU.  Four  are  in  pharmaceuticals:  Gedeon  Richter  (in  Hungary),  Krka  (Slovenia),  Mabion 
(Poland) and Captor Therapeutics (Poland). Three are in ICT: Asseco (Poland: IT solutions for banking and 
finance), CD Project (Poland: video games), and Synektik (Poland: IT solutions for the health sector). The last 
is CEZ, the electricity producer (Czechia). Absent from this list are firms that spend heavily on R&D in CESEE 
but are foreign-owned (as R&D is registered in the home country). There are no automotive firms among 
the top R&D spenders headquartered in the region, despite the importance of the automotive sector for 
the  EU’s  R&D  spending.  Skoda’s  300mn  EUR  R&D  spending  in  20221 is  counted,  for  example,  towards 
Volkswagen’s almost 19bn EUR. 

CEZ, Asseco, Gedeon Richter, and Krka are very large companies with turnovers in excess of 1bn EUR in 2023 
and  over  10,000  employees  each,  with  their  incorporation  dating  back  many  decades.  They  have  many 
subsidiaries abroad, including in countries that specialise in R&D activities in their respective businesses: the 
ICT company Asseco has more than two dozen subsidiaries in the US, while the subsidiaries of CEZ and the 
pharmaceutical companies Gedeon Richter and Krka lie mainly in the EU and Switzerland. 

The  other  four  companies  were  founded  after  2000.  Among  them,  Captor  Therapeutics  is  by  far  the 
youngest, having been founded in 2015, and the smallest with a turnover of 4.4mn EUR in 2023. It has a 
subsidiary in Switzerland. CD Project, considerably larger with a turnover of over 300mn EUR in 2023, has 
several subsidiaries in Northern America. 

Despite  the  progress,  significant  gaps  persist  that  must  be  addressed  to  ensure  the  region’s  growth  and 
competitiveness. China, the US, and, to a lesser extent, the rest of the EU, have also amplified their innovation 
investments,  raising  the  bar  for  the  CESEE  region.  The  region  is  grappling  with  a  severe  skills  shortage:  the 
number of Science, Technology, Engineering and Mathematics (STEM) graduates in CESEE has plateaued over 
the past decade, while the overall number of graduates has declined by more than 20%.5 In 2023, only eight of 
the world’s largest 2500 R&D investors had their headquarters in the CESEE region.6 The same year, residents in 
the entire region only filed a mere 1585 patents with the European Patent Office (EPO), in stark contrast to 
German resident firms, which filed nearly 25,000 patents.7 While productivity growth in the region has generally 
outpaced that in the North and West of the EU, it has recently shown signs of deceleration. 

5  
Source: Authors’ calculation based on Eurostat, comparing 2013/14 with 2020/21. 
6  
Source: The 2023 EU Industrial R&D Investment Scoreboard | IRI (europa.eu) 
7   By residence of the first applicant. Source: Authors’ calculation based on EPO. 

4 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
                                                                 
1.2  Sectoral and geographical concentration of innovation 
Both surveys (Figure 3a) and patents (Figure 3b) show that innovation is concentrated in the same sectors in the 
CESEE region as in North and West of the European Union. The main areas of industrial innovation are vehicles, 
the chemical and pharmaceutical sectors, information and communication technology (ICT), and intermediary 
products.  

Figure 3a: Product innovations in selected sectors 
(% of firms) 

Figure  3b:  Distribution  of  patents  granted  (by  area, 
2023, % of patents granted) 

Industry (ex construction)

of which: Motor vehicles

of which: ICT manufacturing

of which: Chemical and
pharma

Services

of which: Media services

of which: ICT services

of which: Professional
services

100%

80%

60%

40%

20%

0%

Mechanical
engineering

Chemistry

Instruments

Other fields

Electrical
engineering

0

20

40

60

80

EU-CESEE

EU-NW

EU-NW EU-CESEE

Source:  Eurostat  Community  Innovation  Survey  2020.  Note: 
Industry  ex  construction:  B-E,  Motor  vehicles:  C29-C30,  ICT 
manufacturing:  C26-C28,  Chemical  and  pharma:  C19-C22, 
Services: G46-M73_INN, Media services: J58-J60, ICT services: 
J61-J63,  Professional,  scientific,  and  technical  services:  M71-
M73. 

Source: European Patent Office. Note: Regional allocation of patents 
by residence of first applicant.  

In almost all sectors, the share of innovative firms appears to be smaller in the CESEE region than in the North 
and West of the EU. The share of patents in key technologies (green, digital, and biotech) is about the same in 
the CESEE region, with a somewhat greater share of biotech (15% vs 10%) and smaller share of green patents 
(13% vs 10%).8 In the services sector, ICT and professional services stand out as the most innovative.  

8  

Source:  EIB  staff  calculations  based  on  Patent  Cooperation  Treaty  (PCT)  patents  (PATSTAT)  in  collaboration  with  the  Research  and 
Development Monitoring Research Centre (ECOOM) at KU Leuven university. Note: Patents in green technologies are measured based 
on  the  methodology  of  Haščič  and  Migotto  (2015),  with  further  adjustments  implemented  by  ECOOM.  The  patent  classification  in 
biotechnology is based on the classification established by KU Leuven. The biotechnology domain is the combination of Fraunhofer 
technology classes 15 (biotechnology) and 16 (pharmaceuticals). The digital patent classification is based on the European Patent Office 
(EPO) (2017). Patents may be allocated to multiple categories. 

Section I: Common elements | 5 

 
 
 
 
 
                                                                 
Figure 4: Employment in technology and knowledge-intensive industries (% of total employment) 

Source: Eurostat Science and Technology. 

Research and development tends to take place in major cities, often centred around excellent universities or 
research  institutions.  In  the  services  sector,  the  region’s  capital  cities  are  often  hubs  for  R&D  activities.  In 
manufacturing, R&D tends to be located together with production outside capital cities. Figure 4 proxies their 
location by the regional share of employment in technology and knowledge-intensive industries. (A map drawn 
for overall, or business, R&D expenditures, would look qualitatively very similar.) For example, Warsaw has a 
growing reputation in the IT and fintech sectors, driven by a strong academic foundation in computer science 
and engineering. Prague hosts several innovative companies in IT, AI, and robotics (eg, Avast). The city has a 
vibrant startup scene with many incubators and accelerators. Brno is home to a thriving innovation ecosystem, 
particularly in IT, life sciences, and engineering. However, in an international comparison, the region is not a hub 
for  innovation  clusters.  For  example,  the  World  Intellectual  Property  Organization  only  ranks  a  single  CESEE 
cluster, Warsaw, among its top 100 clusters in its 2023 Science and Technology Cluster Ranking. In contrast,  
16 clusters in the North and West of Europe are among the top 100.3  

6 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
1.3  Dispersion of innovation activities across firms 
On  average,  firms  in  in  the  EU-CESEE  region  invest  less  in  digitalisation  and  innovation  compared  to  their 
counterparts in the North and West of the EU. This disparity is in part due to a higher proportion of firms in the 
CESEE region that allocate minimal or no investment towards R&D and digitalisation. 

Figure 5a: Distribution of investments in R&D 
across firms (% of total investment expenditures) 

Figure 5b: Distribution of investments in digital 
technologies across firms (% of total investment 
expenditures) 

100

80

60

40

20

0

100

80

60

40

20

0

US

EU-NW

EU-CEE

US

EU-NW

EU-CEE

<1%

1-10%

10-20%

20-50%

>50%

<1%

1-10%

10-20%

20-50%

>50%

Source:  EIB  Investment  Survey,  2016-23.  Note:  The  bars  report  the  investment  shares  for  the  financial  year  preceding  the  (annual) 
interviews. Data for the US are for 2018-22. 

For instance, during financial years 2015-2022, 76% of firms surveyed in the CESEE region allocated less than 1% 
of their total investment expenditures towards R&D (Figure 5a). Only 72% of firms in the North and West of the 
EU, and a mere two-thirds of firms in the US, reported similarly negligible R&D investments. The difference is 
driven mainly by manufacturing, where 65% of CESEE firms but only 54% of firms in the North and West of the 
EU spend less than 1% of their investment in R&D.  

Moreover, firms in the CESEE region that allocate a large portion of their investments to R&D are less common. 
For example, only 8% of firms in the CESEE region allocated more than 20% of their investment expenditures 
towards R&D, compared to 12% in the North and West of the EU, and 10% in the US.  

These trends are also evident in investments in digital technologies (Figure 5b).  

Section I: Common elements | 7 

 
 
 
During 2016-2023, 44% of firms surveyed in the CESEE 
region  allocated  less  than  1%  of  their  investment 
expenditures towards digitalisation. In contrast, such a 
low  share  of 
in  digitalisation  was 
observed for only 33% of firms in the North and West 
of the EU, and 26% of firms in the US. 

investments 

Relatively low investments in innovation translate into 
weaker  innovation  activities.  However,  while  larger 
shares of firms in the US innovate than in the EU, the 
differences  between  firms  in  the  CESEE  region  and 
those in the North and West of the EU appear small 
(Figure 6).  

One  reason  may  be  transfers  of  technology  through 
FDI, which allows firms in the CESEE region to innovate 
by adopting technologies that are new to the firm or 
the  country  without  incurring  the  corresponding 
investments in R&D (see Section 2.1). 

Figure 6: Distribution of innovation across firms (% 
of all firms) 

100

80

60

40

20

0

US

EU-NW

EU-CESEE

No innovation

New to the firm

New to the country New globally

New technologies appear to diffuse more slowly to the 
least  productive  firms  in  the  CESEE  region:  within 
sectors, labour productivity is more dispersed than in 
the  North  and  West  of  the  EU.  This  dispersion, 
measured  as  the  standard  deviation  relative  to  the 
mean, is high because some firms are highly productive, but average productivity remains lower than in the 
North and West (Figure 7). One reason is the higher proportion of small firms in CESEE economies. Smaller firms 
typically  have  lower  productivity  than  larger  firms,  partly  because  they  face  greater  challenges  in  accessing 
finance to fund innovations (see section 2.3). The productivity gap between small firms in the CESEE region and 
those in the North and West of the EU is particularly large (Figure 8a). 

Source: EIB Investment Survey, 2016-23. Note: The bars report the 
share of firms that did not innovate and of those that innovated, 
by  type  of  innovation,  during  the  financial  year  preceding  the 
(annual) survey. Data for the US are for 2018-22. 

8 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
Figure 7: Estimated distribution of labour productivity (selected sectors, CESEE and North and West of the 
EU) 

Source: Authors’ calculations using Compnet.  
Note: Due to data limitations, the density functions are based on CZ, HR, HU, LT, LV, SI for CESEE and on BE, DK, FI, NL, SE for the North 
and West of the EU, for 2019 using 2010 prices. Procedure: (1) Sampling from the distributions of log of labour productivity, for which 
Compnet provides percentiles at the (country, sector) level, with the number of draws proportional to employment in the respective 
country and sector; (2) pooling the samples across countries within each macro region; (3) estimating the distributions of the pooled 
samples. 

1.4  Public support for research, development, and innovation 
Spending on R&D in the CESEE region is about half of that in the North and West of the EU. The gap is particularly 
pronounced in business R&D, with businesses in CESEE spending only 0.8% of GDP on R&D compared to 1.8% in 
the North and West (Figure 8b). 

Even  though  CESEE  governments  spend  less  overall  on  R&D,  they  support  a  larger  share  of  business  R&D  
(Figure 9a). In 2021, government funding accounted for 10% of business R&D in the CESEE region, compared to 
only 4.5% in the North and West. Additionally, transfers from other sources, such as EU funds (including Horizon 
and structural funds) and contributions from multinational companies, provide significant funding for domestic 
R&D activities (Figure 9b). 

Section I: Common elements | 9 

  
Figure 8a: Labour productivity of firms in CESEE (% 
of productivity of firms in the North and West of the 
EU, 2021) 

Figure 8b: Spending on R&D by sector of 
performance (2021, % of GDP) 

50

40

30

20

10

0

0-9

10-19

20-49

50-249

GE250

3

2.5

2

1.5

1

0.5

0

Private non-
profit sector

Higher
education

Government

Business

Source: Eurostat Structural Business Statistics. 

Source:  OECD MSTI. 

EU-NW

EU-CESEE

Figure 9a: Financing sources of business sector R&D 
(2021, % of GDP) 

Figure 9b: Key public financing sources for projects 
related to R&D and innovation  
(2014-20, % of GDP) 

2.5

2

1.5

1

0.5

0

Government

Business

Rest of the
World

0.6

0.5

0.4

0.3

0.2

0.1

0

Horizon 2020

State Aid

EU Cohesion
Funds

EU-NW

EU-CESEE

EU-NW

EU-CESEE

Source:  OECD  MSTI.  Note:  Total  financing  does  not  equal  total 
spending in Figure 8b due to differences in the data sources, see 
OECD (2015), section 12.6. “NW” omits DK,  “CESEE” omits BG, RO, 
HR. Rest of the World (eg, EU structural funds, financing by foreign 
parent  companies  of  R&D  in  their  domestic  subsidiaries)  is  the 
average contribution of financing from abroad across countries in 
each region.  

Source: Authors’ calculations using project-level information on EU 
structural  funds  provided  in  Kohesio  and  in  Horizon  2020.  Note: 
“EU Cohesion Funds” shows the value of funding whose objective 
includes “Research and Innovation” or “ICT”. “State Aid” includes 
funding  whose  objective 
is  "Research,  development  and 
innovation". 

10 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
 
 
2  Challenges and opportunities 

Stimulating innovation across the CESEE region presents numerous challenges, many of which are not unique to 
this  area.  These  challenges  include  increasing  the  availability  of  the  skills  necessary  for  innovation,  securing 
adequate  risk  capital,  adopting  cutting-edge  technologies,  all  while 
improving  the  overall  business 
environment.9  Labour shortages are already prompting some firms to shift their innovation activities from the 
North and West of the EU to the CESEE region, and within the CESEE region to its less developed areas. However, 
expanding these innovation activities into larger innovation hubs is a complex task. It requires the concurrent 
presence of skilled talent, access to finance, and firms engaged in research and development. Each of these 
elements  is  more  easily  attracted  to  locations  where  the  others  are  already  well-established.  Consequently, 
creating new innovation hubs involves overcoming the interdependencies and inertia that favour the established 
centres of innovation in the North and West of the EU.10  

In this section, we concentrate on three specific challenges, where we can contribute expertise gained through 
our annual large-scale corporate investment survey and through our lending activity in the region: capitalising 
on foreign direct investment and foreign ownership; addressing the acute shortage of appropriately skilled staff; 
and enabling the transformation of ideas into innovative products and services through cooperation between 
universities and business and the provision of risk capital. 

2.1  Augmenting the role of foreign-owned firms in innovation 
When the CESEE region moved to market-based economies in the 1990s, governments viewed FDIs as a key 
channel for the adoption of technology, the build-up of an export base, and the economic convergence of the 
CESEE region to the rest of the EU. Attracted by the proximity to key export markets, generous government 
incentives, and an ample availability of cheaper skilled labour, FDI flowed mainly from countries in Western and 
Northern Europe (Figure 10a). From 1993 to 2020, foreign investment in the CESEE region averaged 4.4% of 
CESEE GDP, outpacing the global average of FDI inflows, which stood at 2.5% of global GDP (Jovanović and Hanzl-
Weiss, 2022). 

Today, foreign firms hold a central position in the CESEE economies. They contribute 40% to the region’s value 
added and account for just over 25% of employment, both figures being double their counterparts in the rest of 
the  EU.11 Foreign  ownership  shares  are  notably  high  in  manufacturing,  finance,  and  ICT  (Figure  10b).  In  the 
automotive sector, foreign-owned firms generate nearly 90% of the region’s value added and employ just over 
80% of the sector’s workforce.  

See Zavarská et al (2023) for a recent discussion of some of these challenges. 

9  
10   On  the  importance  of  path  dependency  for  innovation  see,  for  example,  the  stickiness  of  knowledge  at  the  spatial  as  well  as 
organizational  level  (von  Hippel  1994;  Li  and  Hsieh  2007),  and  the  fact  that  knowledge  flows  and  spillovers  are  localized  (Jaffe, 
Trajtenberg, and Henderson 1993; Feldman and Kogler 2010).  

11   Source: Eurostat (Globalisation in Business Statistics). Data are from 2021. 

Section I: Common elements | 11 

 
                                                                 
Figure 10a: Headquarter locations  
(% of value added) 

Figure 10b: Value added and employment of 
foreign-owned firms in CESEE in selected sectors (% 
of total value added and employment) 

100%

80%

60%

40%

20%

0%

Automotive

ICT

Manufacturing

Finance

Business sector (av.)

Administrative support

Professional, scientific
and technical activities

Extra-EU

EU-South

EU-NW

other EU-CESEE

Domestic

EU-NW EU-CESEE

0

20

40

60

80 100

Employment

Value added

Source: Eurostat Globalisation and Business Statistics, 2021 

Source: Eurostat Globalisation and Business Statistics, 2021 

Foreign direct investment can be an important driver of innovation, directly and indirectly. Foreign-owned firms 
can stimulate innovation directly by providing finance, transferring technology, managerial and organisational 
know-how,  contact  to  foreign  markets,  and  via  their  own  local  R&D  activities.  Indirectly,  these  firms  can 
stimulate innovation within their supply chain by demanding enhanced quality of goods supplied. They can also 
set benchmarks for after-sales service for their customers and prompt competitors to innovate to sustain their 
market presence. Thus, FDI can be a potent driver of innovation including domestic firms.12  

Evidence for the direct role foreign-owned firms play in stimulating innovation is stronger than for their indirect 
role.13 We focus here on this direct effect. The EIB’s Investment Survey provides some evidence that innovation 
by foreign companies was somewhat more tilted towards the development of new technologies, whereas that 
of domestically owned companies was more tilted towards adaptation of technologies.14 

12   The role of FDI in driving innovation is discussed in the economic geography literature part of the discussion of the literature that stresses 
the role played by interregional interactions such as trade or firm investments (Boschma and Iammarino 2009; Neffke et al. 2018; Elekes, 
Boschma, and Lengyel 2019). Another part of the literature emphasises the importance of the relatedness of industries and technologies 
(Boschma 2017; Whittle and Kogler 2020), as exemplified in the product space (Hidalgo et al. 2007, and the second paper of this Series, 
Guadagno et al. 2024), industry space (Neffke, Henning, and Boschma 2011) and knowledge spaces (Kogler, Rigby, and Tucker 2013; 
Kogler, Essletzbichler, and Rigby 2017). See, eg, Crescenzi et al (2022) for a recent contribution and the references contained therein. 

13   See Smelc (2023) for a recent literature overview. 
14   Ultimate ownership information was obtained from ORBIS for almost 16,000 firms, corresponding to two thirds of firms interviewed in 
EIBIS during 2015-19 and 2022. Unmatched firms’ innovation resembled those of domestically owned firms. Results are weighted to 
match the overall distribution of firms (domestic and foreign owned) to the distribution of value added of firms independently of their 
ownership, rather than separately for each group of ownership. Imperfect matching and the weighting procedure may introduce biases 
in the reported results.  

12 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
 
                                                                 
Figure 11a: R&D investments in EU-CESEE by 
location of ultimate owner 
 (% of total investment expenditures, 2015-22) 

Figure 10b: Novelty of innovations in EU-CESEE by 
location of ownership (% of firms, 2015-22) 

100

80

60

40

20

0

>10%

1-10%

<1%

100

80

60

40

20

0

New to country
or globally

New to firm

No innovation

Domestic

Foreign

Domestic

Foreign

Source: EIB Investment Survey. Note: The bars report the share of 
EU-CESEE firms that spend less than 1% of their investment on R&D 
(blue  bar),  between  1-10%  (light  grey  bar),  and  more  than  10% 
(dark grey) on average during 2015-19 and 2022.  

Source: EIB Investment Survey. Note: The bars report the share of 
EU-CESEE  firms  that  did  not  innovate  (blue  bars),  introduced 
products, services, or processes new to the firm (light grey bars), 
and  products,  services,  or  processes  new  to  the  country  or  the 
world (dark grey) in the financial year preceding the interview on 
average during 2015-19 and 2022. 

During  2015-22,  foreign-owned  firms  directed  a  greater  share  of  their 
investment  towards  R&D  
(Figure 11a). A greater share of foreign companies reported innovations that were new to the country or the 
world, whereas a greater share of domestically owned companies reported innovations that were (only) new to 
the company (Figure 11b). 15   

However, foreign-owned companies are also larger, younger, and more concentrated in manufacturing relative 
to domestic firms. Larger firms and those in manufacturing tend to invest more in R&D independently of the 
location of their owner. Foreign ownership plays less of a role. When comparing like-for-like by controlling for 
size,  age,  location,  and  sectoral  activities,  foreign  ownership  is  associated  with  lower  investment  in  R&D 
(Figure  12a), and no differences in innovation (Figure 12b).16  

15   Greater R&D intensity of foreign-owned firms is also reflected in employment. In manufacturing, 1.7% of CESEE employees work in R&D 
in firms with owners from the North and West of the EU, vs. 1.3% in domestically owned firms. Source: Eurostat Globalisation in business 
statistics. 

16   “Like-for-like” comparisons show predictive margins of the location of ownership in an ordered logit regression that controls for firm 

characteristics.  

Section I: Common elements | 13 

 
 
 
                                                                 
in  EU-CESEE  by 
investments 
Figure  12a:  R&D 
location of ultimate owner, holding constant other 
firm attributes (% of total investment expenditures, 
2015-22) 

Figure  12b:  Novelty  of  innovations  in  EU-CESEE  by 
location of ownership, holding constant other firm 
attributes (% of firms, 2015-22) 

100

80

60

40

20

0

>10%

1-10%

<1%

100

80

60

40

20

0

New to country
or globally

New to firm

No innovation

Domestic

Foreign

Domestic

Foreign

Source: EIB Investment Survey. Note: The bars report the share of 
EU-CESEE firms that spend less than 1% of their investment on R&D 
(blue  bar),  between  1-10%  (light  grey  bar),  and  more  than  10% 
(dark  grey)  on  average  during  2015-19  and  2022,  controlling  for 
their age, year, sector, location, and size. 

Source:  EIB  Investment  Survey.  Note:  The  bars  report  the 
predicted  share  of  EU-CESEE  firms  that  did  not  innovate  (blue 
bars), introduced products, services, or processes new to the firm 
(light grey bars) and new to the country or world (dark grey) in the 
financial year preceding the interview, averaged over 2015-19 and 
2022, controlling for their age, year, sector, location, and size. 

14 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
 
 
Relative to similar domestic firms, foreign firms spend more of their investments on digitalisation than on R&D 
(Figure 13a). Perhaps as a result, they also make greater use of advanced technologies, than domestic firms, 
even when comparing firms that have similar characteristics (Figure 13b).17  

Figure 13a: Investments in digitalisation by location 
of ultimate owner, holding constant other firm 
attributes (% of total investments) 

Figure 13b: Use of advanced technologies by 
location of ultimate owner, holding constant other 
firm attributes (% of firms) 

100

80

60

40

20

0

>10%

1-10%

0-1%

100

80

60

40

20

0

At least one
tech used
everywhere

At least one
tech used
somewhere

No usage

Domestic

Foreign

Domestic

Foreign

Source: EIB Investment Survey. Note: The bars report the share of 
EU-CESEE firms that spend less than 1% of their investment on R&D 
(blue  bar),  between  1-10%  (light  grey  bar),  and  more  than  10% 
(dark  grey)  on  average  during  2015-19  and  2022,  controlling  for 
their age, year, sector, location, and size. 

Source:  EIB  Investment  Survey,  2023.  Note:  The  bars  report  the 
share  of  EU-CESEE  firms  that  used  none  of  the  advanced 
technologies asked about (blue bar), at least one such technology 
somewhere in their business (light grey bar), and at least one such 
technology  everywhere  in  their  business  (dark  grey  bar)  during 
FY2022, controlling for their age, sector, location, and size. 

Greater investments in digitalisation and in advanced technologies are likely to be one of the reasons for which 
foreign firms appear to be more productive than their domestic peers.18 Indeed, on average firms with a foreign 
owner appear to have 12% higher total factor productivity (Figure 14).  

17   The  list  of  technologies  about  whose  usage  firms  were  interviewed  differed  depending  on  the  sector  in  which  the  firm  is  active: 
construction (C), infrastructure (I), manufacturing (M), and services (S). These technologies are: 3D printing (C, I, M), Augmented/virtual 
reality (C, S), Automation via advanced robotics (M), Big Data analytics and artificial intelligence (I, M, S), Drones (C), Digital platform 
technologies (I, S), and The internet of things (all).  

18   Several studies have investigated the impacts of FDI on productivity. Damijan et al. (2003), Javorcik (2004) and Lipsey (2006) have found 
that FDI has produced positive technological spillovers and has had positive effects on productivity, while Bijsterbosch and Kolasa (2010) 
and Damijan et al. (2013) have argued that the productivity effects are heterogenous and depend on where the FDI flows go, with 
industries of higher technology intensity experiencing greater productivity benefits. 

Section I: Common elements | 15 

 
 
                                                                 
Figure 14: Apparent productivity gain through 
foreign ownership (EU-CESEE firms, % increase in 
total factor productivity relative to control group) 

All foreign-owned firms vs
all domestically-owned

Foreign-owned firms
founded as greenfield
investments vs domestically-
owned

Foreign-owned vs
domestically owned firms
that will be taken over

Firms that moved to foreign
ownership relative to their
pre-takeover self

The difference between the productivity of foreign 
and domestically owned firms is particularly large for 
greenfield  investment:  controlling  for  firm-specific 
factors, the  TFP  of  those  firms  in  the  CESEE  region 
that  were  founded  by  foreign  companies  is  almost 
15% larger than that of its domestically owned peers 
(Figure 14, second bar from the top). In contrast, the 
productivity of firms acquired by foreign investors in 
M&A  transactions  increases  only  marginally  after 
relative  to  before  the  takeover  (by  about  1.3%). 19 
The  primary  reason  for  the  higher  productivity  of 
foreign-owned firms is that foreign investors tend to 
that  were  already  more 
acquire  companies 
productive  than  their  domestically  owned  peers 
before  the  acquisition.  In  fact,  domestically  owned 
firms  that  are  later  acquired  are  only  3%  less 
productive  than  foreign-owned  firms  (Figure  14, 
second bar from the bottom). 

5

0

15

10

20

Source:  Authors’  calculations  based  on  ORBIS.  The  results  are 
derived  from  a  firm-level  panel  regression  of  TFP  (obtained  as  an 
OLS residual of a regression of real value added on the number of 
employees  and  the  value  of  the  firm’s  capital  stock)  onto  lagged 
values  of  TFP,  leverage,  cash  ratio,  sales  ratio,  and  total  assets,  a 
foreign  ownership  dummy,  and  country-sector-year  fixed  effects. 
The  sample  combines  all  firms  across  the  CESEE  region  for  which 
data is available in ORBIS during 2008-2020. Error bars are derived 
from standard errors clustered at the firm level. Details are available 
from the authors. 

This  pattern  of  foreign  firms  investing  more  in 
digitalisation and advanced technologies but less in 
R&D  arguably  reflects  the  region’s  ongoing  role  in 
global  value  chains:  a  focus  on  the  production  of 
goods and the provision of services, rather than their 
development  or  post-production  sales  (Stöllinger, 
2019, 2021, Stöllinger and Zavarská, 2023, Guadagno 
et 
experimental 
development activities are often conducted close to 
companies’  headquarters  due  to  the  challenges  in 
monitoring them. The quality and timeliness of the 
delivery  of  intermediate  goods,  such  as  a  car’s 
rubber  mat,  can  be  relatively  easily  specified  in 
contracts. However, the cost, duration, and outputs 
of research and experimental development activities are more elusive. This necessitates a degree of trust in the 
workforce’s skills and motivation from management, who in turn need to monitor progress frequently to ensure 
that projects remain on track. The transfer of expatriate management to ensure monitoring of research and 
experimental development is expensive and might only be justified in large, strategic export markets with large 
pools of skilled staff, such as India, China, and the US. 

al,  2023).  Research 

and 

19   Ownership change between 2008 and 2020. Further productivity gains may arise after our sample ends. However, Gregori at al. (2024) 
argues  that  cross-border  take-over  may  even  result  in  negative  productivity  trend  after  the  treatment,  on  the  larger  sample  of  EU 
countries.  

16 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

                                                                 
 
That said, there are reasons to believe that foreign 
firms  will  become  more  innovative  in  the  region. 
Foreign  companies  are 
increasingly  transferring 
product  testing  and  development  into  the  region. 
This  shift  is  encouraged  by  lower  wage  costs  and 
government  subsidies  aimed  at  attracting  foreign 
investments  into  higher-value-added  tasks.  It  has 
been made possible by the trust that foreign owners 
have  developed  in  the  capabilities  of  the  local 
workforce  over  their  decades-long  presence  in  the 
region. In 2021, the number of employees in R&D in 
foreign  firms  was  2.5  times  higher  than  a  decade 
also 
earlier. 
significantly 
likely  to  report  that  financial 
constraints, which can constrain R&D activities, are 
a barrier to their investments (Figure 15). 

Foreign-owned 

companies 

less 

are 

How  much  this  presence  can  be  expanded  further 
depends  crucially  on  the  availability  of  staff.  In 
Slovakia, for example, the government’s Innovation 
Office estimates that staff is so scarce that any new 
R&D centre would have to attract staff from existing 
centres (Box 3). Additional openings of R&D facilities 
would then not raise the share of higher-value added 
activities  in  the  economy  overall.  In  Romania, 
qualified  staff  is  still  easier  to  find,  and  has,  for 
example,  contributed  to  the  rapid  growth  of  the 
business services sector (Box 4).  

Figure 15: Importance of financial constraints by 
location of ultimate owner, holding constant other 
firm attributes (% of firms) 

100

80

60

40

20

0

Domestic

Foreign

No obstacle Minor obstacle Major obstacle

Source:  EIB  Investment  Survey.  Note:  Predictive  margins  for 
ownership location from an ordered logit controlling for firm age, 
year, sector, location, and size, 2015-19 and 2022. 

Box 3: The role of foreign-owned industrial R&D centres in the Slovak Republic.20 Most industrial R&D centres 
in the Slovak Republic are foreign-owned and started to emerge 10-15 years ago. They were attracted by the 
supply of skilled staff, low wages, and increasing trust in the ability of the local teams to conduct tasks that go 
beyond production. Over time, these centres took on more complex projects. One example is Continental Tires’ 
Technology Center in Puchov, where it had been producing tires since 1950. Puchov lies in Northern Slovakia 
close to the border to Czechia and today houses the largest plant for the production of truck and bus tires in 
Europe. 21 Another  example  is  Takaneda,  a  Japanese  pharmaceutical  company,  establishing  its  “Innovation 
Capability Center” in Bratislava.  

Foreign-owned industrial R&D centres typically include 50-500 employees and are situated at sites where the 
foreign firm also produces, largely because of their focus on product testing and development. As a result, they 
are  located  around  cities  outside  the  capital.  The  proximity  of  a  good  technical  university  is  also  important 
because it enables firms to attract graduates. With Slovakia’s specialisation in automotive, skills in mechatronics 
and  programming  (such  as  to  virtually  simulate  wear  and  tear)  are  in  great  demand.  Concerns  about  losing 
qualified staff discourages the establishment of centres in which competing firms conduct their R&D activities 
close to each other. Silicon-valley-type centres therefore appear some way off. 

Industrial  R&D  centres  are  typically  not  well  connected  with  the  local  economy.  Local  R&D  serve  as  service 
providers to foreign headquarters and can be unaware of domestically owned firms with similar interests. With 
a focus on product testing and development, gains from cooperation with local firms that serve as suppliers may 
not be large. Instead, cooperation with universities, which in any case may offer greater benefits for research 
and  experimental  development,  is  typically  limited  to  lectures  and  internships.  Finally,  internal  approval 
processes for novel types of cooperations that require the approval of company headquarters can be slow. 

20   This box is based on discussions with the Research & Innovation Policies Unit of the Government Office of the Slovak Republic. 
21   Source: Production plant Púchov (continental-tires.com) 

Section I: Common elements | 17 

                                                                 
 
Meanwhile, domestically owned firms are expanding their R&D activities as well. Just as foreign-owned firms, 
they have increased their R&D staff by a factor of about 2.5 between 2011 and 2021.22 By 2021, domestic firms 
employed just above half of all R&D employees in businesses. The productivity of these investments appears to 
be  about  the  same  as  for  foreign-owned  firms.  According  to  our  estimates,  domestically-owned 
R&D investments are followed by innovations with about the same likelihood as in foreign firms. The likelihood 
that innovations are raising their profitability is somewhat lower than for foreign firms; however, the differences 
appear to be small.23  

Box 4: Innovation in business services in Romania 

Over  the  past  years,  Romania's  business  services  sector  has  experienced  robust  growth,  becoming  an 
important contributor to the country's economic development. This box is based on a 2023 survey by the 
Association of Business Service Leaders in Romania among 77 firms in the sector (ABSL, 2023). 

The  industry  is  predominantly  international,  with  75%  of  surveyed  companies  being  foreign-owned.  Of 
these, 30% are headquartered in the Americas and 43% in Europe. Firms most frequently offer IT services, 
finance  and  accounting,  and  procurement  and  supply  chain  management,  most  commonly  in  English, 
German,  Romanian,  French,  and  Italian.  Two-thirds  work  exclusively  for  their  parent  organizations,  the 
remainder offer their services more widely. 

Innovation has been crucial to the sector's growth, particularly through expanding the scope and complexity 
of services. A key driver of this innovation is the adoption of increasingly sophisticated automation solutions. 
Over half of the surveyed companies use robotic process automation (RPA) to automate tasks such as data 
entry, invoicing, and report generation. The use of more advanced technologies, such as autonomic process 
automation and cognitive automation, has also grown. These technologies enhance RPA by incorporating 
autonomous  decision-making  and artificial  intelligence  (AI)  for  more complex  tasks  like  natural  language 
processing and decision support. 

Compared  to  other  CESEE  countries,  Romania  has  relatively  manageable  skills  shortages.  However, 
competition  for  skills  is  intensifying,  particularly  for  those  that  the  industry  is  looking  for:  digital  and 
automation skills and foreign language proficiency. The availability of skills constrains firms’ ability to move 
to regions with lower wage levels. More than two thirds of employees work in Bucharest, a relatively high-
wage region.  

2.2  Overcoming the shortage of skills 
Lack of skilled staff is among the major obstacles to investment for CESEE companies. When asked about their 
major obstacles to investment, innovative firms most frequently quoted a lack of staff with the right skills in 
almost all CESEE countries ahead of the pandemic and the energy price shocks in 2020 and 2021.24 While high 
uncertainty  and  high  energy  costs  have  temporarily  taken  the  top  position,  highly  educated  staff  is  an 
increasingly  scarce  resource.  The  average  unemployment  rate  of  25–64-year-olds  with  tertiary  education  in 
CESEE has declined on average from 4.9% in 2013 to 1.6% in 2023.25  

Low investments in R&D in the public and higher education sectors, an apparent neglect of life-long learning, 
and  emigration  are  key  reasons  for  the  shortages  of  skills.  We  discuss  them  below.  Population  ageing  will 
aggravate the problem: relative to 2023, the number of people aged 25-64 is forecast to decline in the CESEE 
region by 5.5% by 2030 and by 20% by 2050. In contrast, the number of people in same age group is expected 
to remain broadly constant in the North and West of the EU, pushed up by immigration.26 

22   Source: Eurostat (Globalisation in business statistics). Business sector, based on BG, CZ, HU, PL, and SK due to data limitations.  
23   Results are based on (1) a logit regression of a binary variable describing whether a firm innovated, depending on whether it invested 
in R&D in the preceding year, interacted with an ownership dummy; and (2) a panel ordered logit regression of a firm’s profitability on 
the type of innovation it made in the preceding year. Regressions include firm controls and year fixed effects and use data from EIBIS 
and ORBIS. 

24   Source: EIBIS, 2016-23. 
25   Source: Eurostat (LFS). A more direct measure of shortages might be vacancy rates of professionals and skilled technicians / service 

sector employees. However, other than for Hungary, this data is largely missing. 

26   Source: Eurostat EUROPOP2023 (base line forecast). 

18 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
                                                                 
2.2.1  Low public investments in R&D 

Spending on R&D conducted in the public and higher education sectors is – at 0.5% of GDP in 2021 – just over 
half of the average in the North and West, without much change over the past two decades. By now, measures 
of output of R&D suggest that this spending is about as productive as that in the North and West. But it took 
time for these investments to pay off. The share of international co-publications and the share of publications 
among the 10% most cited publications are both just under half of their values in the North and West, up a third 
from  a  decade  earlier. 27  Greater  research  output  is  also  reflected  in  the  increased  the  attractiveness  of 
universities among foreign doctoral students: foreigners now comprise about 15% of all doctoral students in the 
region, up from 5% a decade ago – but still only half the share of foreign doctoral students in the North and 
West of Europe.28 

2.2.2  Low corporate investment in continuous education 

Companies not only spend less on research and development than their peers in the North and West of the EU 
but also appear to offer their staff fewer opportunities for learning and development. According to EIBIS, firms 
in  the  CESEE  region  spend  about  a  third  less  on  training  in  real  terms  (Figure  16a).  This  difference  is  more 
pronounced in infrastructure and manufacturing and noticeably absent in ICT.29  

Figure 16a: Corporate investment in training (EUR 
per employee per year, PPP adjusted) 

Figure 16b: Employees spending all or most of their 
working time using cognitive skills  
(% of employees)  

ICT services

Construction

Other services

Manufacturing

Infrastructure

0

200

400

600

800

EU-NW EU-CESEE

50

40

30

20

10

0

EU-NW

EU-CESEE

EU-NW

EU-CESEE

Manufacturing

ICT

Source: EIB Investment Survey, 2016-23. 

Source: Eurostat LFS, 2022.  

Consistent  with  the  lower  spending  of  companies  in  learning  and  development  is  the  smaller  proportion  of 
employees that spend much time on cognitive tasks in manufacturing (Figure 16b).30 The difference is largest 
for  employees  with  at  most  secondary  education  and  disappears  for  those  with  tertiary  education.  It  likely 
reflects the role that CESEE firms still play in global value chains: a greater focus on production, and less value 
added  in  development  and  post-production  services  (see  above).  Relative  to  the  North  and  West,  skilled 
industrial / service employees make up a much larger share of employment in manufacturing at the expense of 

27   Source: European Commission (2024), European Innovation Scoreboard. GDP-weighted averages of country scores. 
28   Source: Eurostat. 
29   Source: EIBIS, based on 19,721 responses in CESEE and 21,293 in the North and West of the EU. Responses were truncated at the 1 and 
99 percentile, deflated using the national price indices for education, and adjusted for different costs of training across countries using 
service sector PPPs. 

30   Source: Eurostat Labour Force Survey, Ad-hoc module, 2022. 

Section I: Common elements | 19 

 
 
                                                                 
 
 
professionals.31  This has not changed over the past decade. In contrast, the share of professionals has increased 
substantially in ICT, from 49% to 62%, leaving no differences in the composition of the workforces across regions. 
In ICT, cognitive tasks are equally common in the CESEE Region and the North and West of the EU. 

2.2.3  Brain drain 

Emigration has slowed labour force growth in the region since the 1990s. The region’s labour force (aged 25-64) 
grew only 4% between 2000 and 2020 (North and West: +12%).32 The mirror image is the quadrupling of the 
stock of CESEE migrants in the North and West of the EU, from 1.7mn to 6.5mn in 2020.33  

Surveys suggest that emigration, whether temporary or permanent, will continue to depress the labour force in 
the region. Younger and more educated individuals appear more willing to migrate (Barišić et al, 2024).  In a 
recent EU-wide survey, 11% of interviewees in the CESEE region with post-secondary education intend to work 
abroad  for  at  least  two  years.34 Their  preferred  destinations  are  in  the  North  and  West  of  the  EU:  Germany 
(25%), Austria (14%), and the Netherlands (10%), followed by Italy (9%) and Spain (7%).35 Corresponding inflows 
into the region from the rest of the EU appear unlikely: destinations other than the above mentioned ones were 
preferred by only 9% of individuals region with post- secondary education in the North and West, and 4% in the 
South.  Instead, inflows from extra-EU countries appear more likely, whose labour market integration may be 
more challenging (Tverdostup, 2024).   

Data on time spent abroad during a degree point into the same direction. Spending time abroad during a degree 
increases  the  likelihood  of  working  subsequently  in  the  host  country  (Parey  and  Waldinger,  2011).  CESEE 
students are more likely to spend time abroad in the North and West of the EU (1.2% of students) than in other 
CESEE countries (1%). There is no sign of a corresponding inflow to the region: only 0.2% of students from the 
North and West are studying in CESEE, while 1.3% study abroad in their home region.36  

The factors that make emigration attractive tend to change only slowly. Average nominal earnings are twice 
higher in the North and West of the EU relative to Slovenia and almost six times higher relative to Bulgaria, and 
convergence  has  been  slowing.  40%  of  interviewees  with  secondary  or  tertiary  education  most  frequently 
pointed  to  higher  earnings  as  their  reason  for  intending  to  move  abroad  (Eurobarometer,  2022).  A  fifth  of 
respondents  also  pointed  to  the  political  stability,  mentality,  culture,  and  lifestyle  of  their  preferred  host 
countries (Figure 17a).37  

31   60% of manufacturing employees in the CESEE region are classified as skilled industrial workers, vs 40% in the North and West of the 

EU. Only 8.8% are classified as professionals, vs 17% in the North and West of the EU. Source: Eurostat Labour Force Survey.  

32   Source: Eurostat.  
33   The stock of inward migrants only about doubled over the same period, to 0.7mn. Source: UN DESA.  
34   Source:  Eurobarometer  (2022).  Country-level  shares  were  aggregated  using  the  size  of  the  labour  force  aged  25-64  with  tertiary 

education. 

35   Source: Eurobarometer (2022). Respondents were able to indicate multiple destinations. Country-level shares were aggregated using 
the size of the labour force aged 25-64 with tertiary education. There is no breakdown available for preferred destination countries 
other than those mentioned.  

36   Source: Eurostat (Degree mobile graduates). 
37  

In addition, Bygnes and Flipo (2017) found that political dissatisfaction encourages emigration. 

20 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
                                                                 
Figure 17a: Main reasons for choosing host country 
for working abroad (% of interviewees with at least 
post-secondary qualifications) 

Figure 17b: Impact of having lived abroad (% of 
returnees with at least post-secondary 
qualifications)  

Higher salary

Host country lifestyle

Host language known

Host country culture

Secure and politically stable

Good employment
opportunities

Geographical proximity

Family and friends in host
country

Improve professional skills

You would probably be
better off if you had not
moved

You have gained better skills
and qualifications from this
experience

You are qualified for your
current job because of this
experience

It was an important
experience for you, which
had effects beyond
professional life

0

10

20

30

40

50

0

20

40

60

80

EU-CESEE

EU-NW

EU-CESEE

EU-NW

Source:  Eurobarometer  528:  Intra-EU  labour  mobility  after  the 
pandemic, 2022. Question: “Why would you prefer to work in this 
country  or  these  countries?  (MAX.  3  ANSWERS)”  Omits  answers 
that were given less frequently. 

Source:  Eurobarometer  528:  Intra-EU  labour  mobility  after  the 
pandemic,  2022.  Question:  “What  was  the 
impact  of  the 
experience of living or working in another country on your life?” 
Omits answers that were given less frequently. 

In principle, emigration can benefit the region when returning emigrants bring back skills and networks that they 
can apply domestically. In the CESEE region, 10% of those with at least post-secondary qualifications have lived 
and worked abroad, and many report that they returned with improved skills. For example, 20% indicated that 
their experience abroad qualified them for their current role (Figure 17b).38 However, returnees in the CESEE 
region appear to make less use of their abilities compared to their peers returning to the North and West of the 
EU. This may be because they worked in positions below their qualifications and did not acquire new skills, or 
they may be less able to apply their new abilities in the CESEE region.  

2.3  Transforming innovative ideas into marketable products  

and services 

In  this  section,  we  concentrate  on  two  important  aspects  related  to  the  commercialisation  of  research: 
collaborative research between businesses and higher education institutions, and the funding for businesses’ 
R&D endeavours and their commercialisation via venture capital and debt financing.  

2.3.1  Joint research between businesses and higher education institutions 

Not all firms possess the necessary competencies and capabilities to create and commercialize innovations on 
their  own.  For  those  that  do  not,  a  viable  strategy  is  to  share  or  acquire  relevant  resources  through 
collaboration—whether  within  a  corporate  group,  or  with  suppliers,  customers,  universities,  and  research 

38   Source:  Eurobarometer  (2022).  Country-level  shares  were  aggregated  using  the  size  of  the  labour  force  aged  25-64  with  tertiary 

education.  

Section I: Common elements | 21 

 
 
                                                                 
 
 
institutes. Such collaboration can reduce the cost of innovation, although companies still need to invest in R&D 
and develop the skills required to guide these partnerships and fully leverage the knowledge gained. In this brief 
section we focus on the collaboration between firms and universities.39 Strengthening this form of cooperation 
features in many countries’ innovation plans.40 

Universities excel at fundamental research and pioneering technologies while businesses excel at adapting new 
ideas to market needs. Combining the two strengths to guide research agendas and processes has long been 
recognised as a key driver of innovation.41  

Surveys suggest that universities in the CESEE region tend to cooperate less with businesses than their peers in 
the North and West of the EU (Figure 18a).42 Differences are particularly large in manufacturing (15% of firms in 
the North and West, vs 9% in the CESEE region).43 The key success factors are sufficient funding and shared goals 
(Figure 18b). 

Figure  18a:  Extent  of  collaboration  between 
business  and  universities  (%  of  academics  that 
cooperated to a medium or high extent)  

Figure  18b:  Academics’  most  frequently  quoted 
factors that make collaboration successful according 
to academics that cooperate with businesses 

R&D

Commercialisation of R&D
results

Academic / student
entrepreneurship

Funding

Shared goal

Trust

Prior relation with business

0

10

20

30

40

0

20

40

60

80

100

EU-CESEE

EU-NW

EU-CESEE

EU-NW

Source:  University-business  cooperation  in  Europe,  2017.  Note: 
The  bars  show  the  share  of  academics  that  cooperated  with 
businesses to a medium or high extent in the stated activity. 

Source:  University-business  cooperation  in  Europe,  2017.  Note: 
The  bars  show  the  frequency  with  which  these  factors  appear 
among countries’ most often quoted success factors.  

The  factors  holding  back  collaboration  are  cumbersome  bureaucratic  processes  and  a  lack  of  funding  from 
universities, businesses and government. Academics in the North and West agree on the bureaucratic processes 
but, instead of funding, are more concerned about the different motivations of businesses and academics and 
their different time horizons. 

Despite  these  obstacles,  academics  that  are  engaged  in  cooperation  overwhelmingly  intend  to  extent  their 
cooperation, by a margin of over 70% (North and West: 46%). Key success factors, academics from both regions 
agree, are trust and shared objectives. In addition, academics in the CESEE region point to sufficient funding. 
Prior relationships with business partners also facilitate cooperation for CESEE academics, perhaps suggesting 
that there is potential for creating networks or organising events to facilitate relationship building (Galan-Muros 
and  Davey, 2019). Businesses’  assessments  of  the  relative  importance of  these factors  are  very  similar,  with 

39   See Stojčić (2020) for a broader evaluation of different cooperation types, also based the Community Innovation Survey.  
40   Eg, Republic of Estonia (2022), Ministry of Industry and Trade of the Czech Republic (2023), South-East Regional Development Agency 

(for Romania). 

41   See the literature review of Galán-Muros and Plewa (2016). 
42   Source:  University-business  cooperation  in  Europe:  University  Perspective.  Country  studies,  available  at  University-Business 

Cooperation in Europe (ub-cooperation.eu). Data are from 2017 and aggregated using GDP weights. 

43   Source: Eurostat Community Innovation Survey, 2020. Country-level results are aggregated using the number of firms in each country 

as weights. 

22 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
 
                                                                 
those in the CESEE region emphasising a shortage of funding, and those in the North and West differences in 
motivation  and  time  horizon.  Businesses  in  both  regions  agree  that  trust  and  shared  objectives  are  the  key 
success factors. 

Figure 19a: Most frequently quoted factors that 
make collaboration unsuccessful according to 
academics that do not cooperate with businesses 

Figure 19b: Most frequently quoted factors that 
make collaboration unsuccessful, by academics that 
cooperate with businesses 

Bureaucracy

University funding

Different motivations

Business funding

Government funding

Insufficient time

Bureaucracy

University funding

Government funding

Business funding

Different motivations

Insufficient time

Different time horizons

Different time horizons

0

20

40

60

80

100

0

20

40

60

80

EU-CESEE

EU-NW

EU-CESEE

EU-NW

Source:  University-business  cooperation  in  Europe,  2017.  Note: 
Bars show the frequency with which these factors appear among 
countries’ most often quoted factors. 

Source:  University-business  cooperation  in  Europe,  2017.  Note: 
Bars show the frequency with which these factors appear among 
countries’ most often quoted factors.  

2.3.2  The availability of risk financing in private markets 

Expanding the availability of risk capital is crucial for fostering innovation, especially among young firms. Payoffs 
from research and development tend to take time to materialise, if they materialise at all. This type of activity 
is therefore frequently financed out of internal resources. Firms that tap external finance to fund research and 
development are typically large (with a portfolio of products at different stages in their lifecycle) or have physical 
assets in place that can be used as collateral. Young and small innovative firms need to rely on patient, risk-
friendly investors that provide, for example, venture capital or venture debt.  

Venture capitalists (VC) provide funding to startups that have the potential for rapid growth but may not yet be 
profitable. These companies are typically perceived as too risky for banks. They often operate in industries like 
technology,  biotechnology,  and  other  sectors  in  which  successful  commercialisation  of  innovation  requires 
disruptive investments and scale. The activity of venture capitalists serves as an indicator of the vitality of the 
startup environment. Despite slowdowns in 2016, 2020, and 2023, VC investments have grown significantly in 
CESEE  countries  over  the  past  decade.  They  averaged  nearly  USD  3  billion  annually  in  the  last  three  years, 
compared to less than USD 1 billion per year in the previous decade (Figure 20a). The average size of VC deals 
in CESEE has also steadily increased, reaching around USD 2.3 million in the last three years, up from below USD 
1 million on average during 2011-2020. However, the average size of VC deals in CESEE remains smaller than in 
North-West Europe and Southern Europe, where deal sizes averaged close to USD 6.5 million and USD 4 million, 
respectively, during 2021-2023. 

Section I: Common elements | 23 

 
 
 
 
 
Figure 20a: Venture capital investments in CESEE 
(USD bn) 

Figure 20b: Share of venture capital investment by 
country (% of CESEE total) 

4

3

2

1

0

0
1
0
2

1
1
0
2

2
1
0
2

3
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

9
1
0
2

0
2
0
2

1
2
0
2

2
2
0
2

3
2
0
2

Source:  Authors’  calculations  based  on  Pitchbook  data.  Note: 
The data have not been reviewed by PitchBook analysts. 

100

80

60

40

20

0

21

7

9

16

20

28

Other

Czechia

Lithuania

Hungary

Poland

Estonia

Source:  Authors’  calculations  based  on  Pitchbook  data.  Note: 
Based on the total volumes between 2013-2023. Other countries 
include Croatia (6%), Bulgaria (4%), Romania, Slovakia and Latvia 
(3% each) and Slovenia (2%). The data have not been reviewed by 
PitchBook analysts.  

The share of VC investments in CESEE countries as a share of EU doubled in recent years. However, relative to 
the rest of the EU, the region remains relatively marginal as a destination for venture capital: from 3% in 2013, 
CESEE VC investments reached only 5% of the EU total in 2022 and 2023. The region’s share in the number of 
deals rose from 6.5% to 11% in 2023. 

Only Poland and Estonia rank among the top ten promising European countries for VC investments in the latest 
European Investment Fund (EIF, 2023) survey. Estonia dominates CESEE VC investments, accounting for 28% of 
the region's total between 2013 and 2023, followed by Poland (20%) and Hungary (16%), see Figure 20b. Estonia 
also leads in VC investments per capita, ranking among the top EU countries, largely due to later-stage rounds 
for Bolt44, which made up 45% of Estonia’s total VC inflows in 2021 and 2022. 

Several barriers hinder the growth of the VC market in the CESEE region, many of which are difficult to address 
through  policy.  One  challenge  is  the  chicken-and-egg  problem  that  affects  innovation  ecosystems,  favouring 
established VC markets. As a result, many innovators relocate to places like San Francisco, London, or other EU 
countries to secure funding. The VC industry in the CESEE region is relatively young, with a shorter history of 
successful  exits  compared  to  more  mature  markets  like  the  UK  and  the  US.  Additionally,  the  small  size  of 
individual CESEE economies limits the growth potential of firms and the average investment size of VC funds and 
makes  it  more  difficult  for  funds  to  diversify  their  investments  within  a  single  country.  Investing  in  multiple 
countries within the region adds to a fund’s legal and due diligence costs. Furthermore, venture capital funds in 
the CESEE region struggle to attract qualified staff (EIF, 2023), just as firms in the region more broadly. 

44  Bolt is a mobility company, offering ride-hailing but also food delivery, micro mobility (scooters, bikes) and carsharing services, which 
was founded in 2013 in Estonia. Bolt is currently having 150 million customers across countries. In recent years, the   company 
received later stage VC rounds of EUR 120m in 2020, EUR 600m in 2021 and 628m in 2022.  

24 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
 
                                                                 
3  Policy implications 

Innovation  benefits  from  many  of  the  broad  policies  that  support  competitiveness,  economic  growth,  and 
wellbeing. Improving the business environment to reduce regulatory and political uncertainty, strengthening 
economic and social infrastructure to attract people and firms, and raising the availability of finance through 
better integration of EU capital markets are policies that would very likely stimulate not only allocative efficiency 
but also innovation.  

That said, there is also a case for policies specifically targeting innovation. Where production has focused on 
low-value-added  activities,  as  in  some  sectors  and  regions  in  CESEE,  innovation  is  hampered  by  its  path 
dependency. Skills, finance and risk capital, and the presence of firms with similar specialisations are almost 
complementary  ingredients  to  innovation.  Their  complementarity  implies  that  innovation  tends  to  happen 
where it has taken place in the past. Bringing innovation to a new region requires simultaneous investments in 
all areas. This is difficult and argues for innovation policies that support each one of these factors while it is 
falling behind the others. The following paragraphs mention a few of these policies, taking up the discussion on 
challenges in the preceding section.45  

Foreign  ownership:  Foreign-owned  firms  appear  more  productive  and  innovative  but  this  can  largely  be 
explained  by  their  size  and  sector  of  activity.  It  is  not  necessarily  a  direct  effect  of  foreign  ownership.  Only 
greenfield  investments  appear  to  have  a  clear  productivity  advantage  over  domestic  firms.  Firms  that  have 
undergone foreign takeovers seem more productive than their domestically owned peers, but in part because 
they were already more productive before the ownership change. In addition, the academic consensus is that 
spillovers from foreign to domestic firms appear quite small, and can be even negative (Gregori et al, 2024). 
Overall, therefore, our analysis provides support for encouraging greenfield investment but not for privileging 
foreign to domestic ownership more generally. However, if only due to the large presence of foreign owned 
firms, FDI is set to continue to provide a source of finance and innovative technologies to the region. Most CESEE 
countries  put  FDI  on  the  same  footing  as  the  domestic  industry  in  their  industrial  policies  (eg,  BG,  EE,  SI).46 
In addition, some CESEE countries provide incentives for domestically or foreign-owned firms that are targeted 
towards activities that would help functional diversification (eg, CZ, PL, RO, SK). 

Skills:  Improving  skills  for  innovation,  is,  just  as  for  skills  more  generally,  a  long-term  endeavour.  Policy  can 
encourage the take-up of STEM subjects, in particular among women (eg, OECD, 2011, 2012, 2023), strengthen 
research  outputs  through  systematic,  independent  evaluations  (eg,  OECD,  2010),  and  invest  in  professional 
development of academic staff to improve the quality of university education. The difficulty lies in setting the 
right  incentives.  For  example,  including  publication  counts  into  performance-based  contracts  can  provide 
incentives to publish more but of lower quality. 

Innovation  thrives  in  a  diverse  and  inclusive  environment.  Therefore,  maintaining  an  open  stance  towards 
qualified immigration is essential. The recent immigration in the CESEE region from Ukraine presents a unique 
opportunity to bolster the talent pool (eg, Strzelecki et al., 2022, for Poland). Governments can make it easier 
for immigrants to put their skills to use through local language education, by providing support services to help 
families settle into the community, by increasing the number of foreign-language schools for expats, and by 
offering  foreign-language  programmes  at  universities  (eg,  Research  and  Innovation  Authority  of  the  Slovak 
Government Office, 2023).  

Finally, enhancing cultural, health, and transport infrastructure can make the region more attractive to both 
returnees and potential new residents. These investments not only help in retaining talent but also in attracting 
new, skilled individuals who are crucial for fostering innovation.  

Facilitating  the  transformation  of  ideas  to  products.  We  focused  on  two  aspects:  cooperation  between 
universities and businesses, and the availability of risk finance. Regarding the former, survey results are quite 
clear: bureaucratic procedures are to be slimmed down, and more funding needs to be provided, to make these 
cooperations more successful in the East of the EU. The success factors are also interesting in this respect: aside 
from funding, the most important are prior relationships, shared goals, and trust. Prior relationships and trust 

45   See, for example, Zavarska et al (2024) for policy recommendations at the country level. 
46   Hungary sticks out in that it promotes domestic ownership in all but the manufacturing sector. See Zavarska et al (2023), p. 101. 

Section I: Common elements | 25 

                                                                 
might be fostered through networking events. Shared goals might require rewarding research cooperation more 
on the side of universities – that is, on ensuring that evaluation and professional success of academics not only 
depends on publications.  

The lack of risk finance is an issue throughout the EU, but it is an even greater obstacle to investment for small 
companies  in  its  Eastern  countries.  The  key  issues  are  small  scale,  poor  liquidity,  and  few  diversification 
opportunities.  These  problems  are  typical  for  small  jurisdictions  such  as  those  in  the  CESEE  region. 
Unfortunately, they are also complementary, such that they need to be tackled together. For example, liquid 
equity markets attract early-stage investors because they provide an opportunity to exit. When the market is 
small,  fixed  investment  costs  –  such  as  those  needed  to  understand  the  regulatory  framework  –  can  deter 
investors  and  prevent  its  growth.  Development  banks  can  play  an  important  role  in  substituting  for  absent 
private markets and in supporting their development (see Box 5 on the European Investment Bank’s funding of 
innovation). In the medium term, a further integration of EU capital markets and predictable, transparent, and 
growth-friendly economic policies appear to be necessary. 

Box 5: Financing Innovation in CESEE: the role of the European Investment Bank 

Innovation  is  crucial  for  Europe’s  green  and  digital  transitions,  as  well  as  for  reducing  dependence  on 
strategic imports and technologies. It is also essential for preserving Europe’s competitiveness and ensuring 
that jobs and wealth are created domestically. In this context, the European Investment Bank Group stands 
as one of the largest public supporters of innovation within the European Union, providing both long-term 
capital and advisory support. 

26 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

Since 2000, the European Investment Bank Group – comprised of the European Investment Bank and the 
European Investment Fund - is one of the largest public supporters of innovation in the European Union: it 
has invested over EUR 270 billion in innovation and skills. In 2023 alone, the Group provided, in terms of 
signatures, overall EUR 19.7 billion to support innovation, digitalization, and human capital, out of a total of 
EUR 87.9 billion in new financing. This investment has led to tangible outcomes, such as 11.6 million new 5G 
service  subscribers,  improved  healthcare  for  130.6  million  people,  and  financing  for  education  facilities 
benefiting  1.2  million  students.  Through  the  European  Investment  Fund  (EIF),  the  EIB  Group  is  also  the 
largest provider of venture capital in the European Union. The EIF has supported nearly half of the European 
unicorns—young companies valued at over USD 1 billion—that have emerged in the past 15 years. 

Figure 21: EIB Group support for innovation (% of 
R&D expenditures 2022) 

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

EIBG Innov/RnD

EIBG Innov/RnD

CESEE

Non-CESEE

Source: Authors’ calculations based on EIB Group. Note: Numbers 
are based on the overall projects’ contribution to the Innovation, 
Digitalization  and  Human  Capital  (IDHC)  policy  area  of  the  EIB 
Group,  assessed  based  on  eligibility  criteria  of  at  the  project’s 
appraisal. EU-wide projects are excluded from the calculations. The 
most recent R&D data from Eurostat is available for 2022. Source: 
authors’ calculations based on EIB disbursement data and Eurostat.  

for 

The  EIB  Group's  support 
innovation 
manifests  in  several  ways:  development  and 
commercialization of new products, processes, 
and business models; promotion of investment 
in R&D, education, upskilling, and training; and 
improving  connectivity  and  access  through 
broadband and mobile networks. It also fosters 
the adoption and diffusion of digital and other 
emerging  technologies  across  various  sectors, 
change  mitigation, 
including 
digitalisation, and the space industry.  

climate 

The innovation support in the CESEE countries 
appears  to  be  more  relevant,  if  compared  to 
R&D expenditures, than in other regions across 
the  EU.  The  share  of  EIB  Group  signatures  to 
innovative  projects  represented  around  7.5% 
of the region's total R&D expenditures in 2022. 
This proportion is substantially larger than the 
share  of  innovation  signatures  among  other 
EU27 countries (Figure 21). 

By co-financing innovative projects, the EIB encourages the participation of other investors from the private 
and public sector and stimulates the development of markets for risk capital.  For example, Czechia and the 
European Investment Fund (EIF) in 2023 launched a EUR 55 million fund of funds, backed by the Recovery 
and  Resilience  Facility,  to  support  investments  in  early-stage  venture  capital  funds  focused  on  strategic 
digital technologies. 

The RRF Czech Fund of Funds, managed by the EIF, will invest in three venture capital funds: a pre-seed co-
investment fund, a fintech fund focused on applications of distributed ledger technologies, and a technology 
transfer fund commercialising research from leading Czech universities in the field of artificial intelligence.1 
These funds aim is to attract funding from private investors by providing an initial amount of capital and by 
offering management and investment expertise. In its 2024 National Reform Programme, the Czech Republic 
announced its intention to create additional funds of funds with the EIB specifically for seed and pre-seed 
investments into spin-off companies of research organizations.1 

Section I: Common elements | 27 

  
 
 
Section II: Country Dashboards 

This section presents dashboards for each EU-CESEE country, highlighting their unique innovation and growth 
performance. The goal is to show how these countries differ, following the earlier section that discussed their 
common  features.  Unlike  the  European  Commission’s  EU  Innovation  Scoreboard  or  the detailed  briefings  by 
Zavarská et al. (2024), our dashboards include information on economic convergence, fastest-growing sectors, 
and indicators based on the EIB’s Investment Survey. Unlike Zavarská et al. (2024), we do not propose country-
specific economic policies.  

The  following  paragraphs  explain  the  indicators,  their  relevance,  and  provide  examples  from  the  CESEE 
countries.47  

The top part of each dashboard offers background information on the country’s growth performance. The first 
indicator is GDP per person in 2023, adjusted for purchasing power. Higher GDP per person is linked to higher 
wages, which affect FDI and influence migration. It also determines the availability of government resources for 
policies, including innovation support, and serves as a proxy for wealth, influencing investors’ risk aversion and 
their willingness to fund early-stage companies. In 2023, GDP per person ranged from 24,155 euros in Bulgaria 
to 34,383 euros in Slovenia, with Slovenia and the Czech Republic nearing the EU average of 37,780 euros. 

The second indicator, average annual growth relative to the EU average during 2015-23, shows the country’s 
progress toward economic convergence. This period was chosen to include relevant trends while accounting for 
the pandemic and the Ukraine-war-induced energy shock. All CESEE countries outpaced the EU average during 
this time, with growth ranging from +0.3 percentage points per year in Romania and Latvia to +1.5 percentage 
points in Slovenia. 

The third indicator measures the share of foreign-owned firms in GDP within the business economy in 2021, 
reflecting the importance of foreign investment. This share varies from 27% in Slovenia to 49% in Slovakia. 

The  three  indicators  on  the  right  highlight  the  most  research-intensive  sectors,  contrasting  them  with  the 
fastest-growing  sectors  and  those  contributing  the  most  to  GDP  growth.  R&D  intensity  is  calculated  by 
comparing firms’ R&D expenditure to their sector’s value added. We aimed for a detailed economic overview 
using a consistent sector classification, balancing granularity with data availability. Consequently, we used 2-
digit NACE codes for most manufacturing and tech-intensive services, while larger aggregates were applied to 
other sectors (see annex for details). Since some sectors are much larger than others, we complemented the 
fastest-growing sectors with those making the largest contributions to GDP growth. 

ICT services stand out for their high research intensity and rapid growth from 2017 to 2021. Despite contributing 
only 2-3% of value added in many countries, they were among the sectors with the largest contribution to GDP 
growth in Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Poland, and Romania. In contrast, less research-
intensive sectors like trade and construction drove growth in other countries. 

The lower section of each dashboard highlights three key areas directly related to innovation: the institutional 
and policy environment, the availability of skills and knowledge, and innovation outcomes. Each indicator shows 
the  country’s  score,  the  range  of  outcomes  in  the  CESEE  region  (noted  by  >  and  <),  and  the  EU  average, 
represented by a blue dot. 

The institutional and funding environment is assessed through the business environment, government spending 
on education, the share of business R&D funded by the government, and the size of venture capital markets. 
The  business  environment  indicator  is  an  average  of  24  metrics  related  to  political  effectiveness,  private 
enterprise policies, and competition and tax regimes, compiled by the Economist Intelligence Unit. Despite only 
reporting their average, we retain over 90% of the variation within the CESEE region because the components 
are  highly  correlated  across  countries.  A  higher  score  indicates  a  better  business  environment,  with  Croatia 
scoring the lowest among CEE countries and Estonia performing above the EU average. 

In  addition  to  this  broad  measure,  we  include  two  indicators  specifically  related  to  innovation:  education 
spending, which underpins long-term innovation, and the share of business R&D funded by the government. 
Estonia leads in education spending, while Hungary tops in government-funded business R&D. The outcomes 

47   Due to limited data availability, the indicators do not all refer to the same years.  

28 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

                                                                 
are reflected in PISA scores for mathematics and science, and in business sector R&D expenditures. PISA scores 
correlate  strongly  with  education  spending,  with  a  correlation  exceeding  90%.  Business  R&D  spending  also 
correlates with government funding, albeit at a lower 50%, suggesting that business R&D is given more support 
where so far it has been low, or possible inefficiencies in support allocation or design. Slovenia’s business sector 
spends the most on R&D relative to GDP, while Romania and Latvia spend the least. 

Risk capital availability, represented by total venture capital investments from 2013 to 2023, is also included in 
this section. Instead of using USD per capita, we show levels to highlight market size. As expected, venture capital 
markets  are  larger  in  wealthier  countries,  with  Estonia  outpacing  Slovenia  by  nearly  thirty  times  during  this 
period. 

The middle section focuses on the availability of skills and knowledge for innovation. Beyond PISA scores and 
business  R&D  expenditures,  we  present  the  share  of  STEM  graduates  in  2021  –  the  share  of  those  with 
university-level  science,  technical,  engineering,  or  maths  qualifications  –  and  firms  cooperating  with 
universities, from 2020. Countries with higher university cooperation also tend to have strong collaborations 
with research institutions, with an 85% correlation. Slovenia and Estonia score highest in this area, while Bulgaria 
ranks lowest in cooperation, PISA scores, and STEM graduates (only ahead of Hungary). 

The  right  section  displays  indicators  of  innovation  output,  based  on  the  EIB’s  Investment  Survey.  The  first 
indicator measures the average number of advanced technologies that firms use. This is based on interviews 
conducted in 2022 and 2023 in which firms indicated whether they use specific technologies in their operations 
or base their business on them. 48 The second indicator, the share of firms introducing new products or services 
to the country or the world during the preceding financial year, averages responses from 2015 to 2022. The final 
indicator assesses the impact of innovation on economic growth and welfare, measured by GDP growth due to 
increased  total  factor  productivity,  which  reflects  growth  not  attributable  to  employment  or  capital  stock 
increases. 

48   The  list  of  technologies  about  whose  usage  firms  were  interviewed  differed  depending  on  the  sector  in  which  the  firm  is  active: 
construction (C), infrastructure (I), manufacturing (M), and services (S). These technologies are: 3D printing (C, I, M), Augmented/virtual 
reality (C, S), Automation via advanced robotics (M), Big Data analytics and artificial intelligence (I, M, S), Drones (C), Digital platform 
technologies (I, S), and The internet of things (all).    

Section II: Country Dashboards | 29 

                                                                 
30 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
Section II: Country Dashboards | 31 

 
32 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

Section II: Country Dashboards | 33 

34 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

Section II: Country Dashboards | 35 

36 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
Section II: Country Dashboards | 37 

38 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

Section II: Country Dashboards | 39 

40 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

Annex: Construction of the dashboard indicators 

GDP per capita 
Source: Eurostat, Statistics | Eurostat (europa.eu), 2023. 

Unit: EUR PPP 

Value added of foreign-owned firms 
Source: Eurostat, Statistics | Eurostat (europa.eu), 2021 

Unit: % of total value added 

Computations: computed the ratio between non-domestic firms’ value added and total value added, for NACE 
aggregate "B-S_X_O_S94". 

Sectors with highest R&D spending relative to value added 
Source: Eurostat, Statistics | Eurostat (europa.eu), 2021  

Unit: % of value added 

Computations: computed the share of each 2-digit sector’s R&D spending (in million Euro) relative to its value 
added. 

Sectors considered:  

NACE 
A 
B 
C10-C12 
C13-C15 
C16-C18 
C20 

C21 

C22 
C23 
C24 

C25 

C26 
C27 
C28 
C29 
C30 
C31-C32 
C33 

D-E 

F 
G 
H 
I 

Name 
Agriculture, forestry and fishing 
Mining and quarrying 
Manufacture of food products; beverages and tobacco products 
Manufacture of textiles, wearing apparel, leather and related products 
Manufacture of wood, paper, printing and reproduction 
Manufacture of chemicals and chemical products 
Manufacture  of  basic  pharmaceutical  products  and  pharmaceutical 
preparations 
Manufacture of rubber and plastic products 
Manufacture of other non-metallic mineral products 
Manufacture of basic metals 
Manufacture  of  fabricated  metal  products,  except  machinery  and 
equipment 
Manufacture of computer, electronic and optical products 
Manufacture of electrical equipment 
Manufacture of machinery and equipment n.e.c. 
Manufacture of motor vehicles, trailers and semi-trailers 
Manufacture of other transport equipment 
Manufacture of furniture; other manufacturing 
Repair and installation of machinery and equipment 
Electricity, gas, steam and air conditioning supply; water supply; sewerage, 
waste management and remediation activities 
Construction 
Wholesale and retail trade; repair of motor vehicles and motorcycles 
Transportation and storage 
Accommodation and food service activities 

Annex: Construction of the dashboard indicators | 41 

J58-J60 

J61 
J62-J63 
K 
N 

O-P 

Q 
R 

S-U 

Publishing,  motion  picture,  video,  television  programme  production; 
sound recording, programming and broadcasting activities 
Telecommunications 
Computer programming, consultancy, and information service activities 
Financial and insurance activities 
Administrative and support service activities 
Public  administration  and  defence;  compulsory  social  security  and 
education 
Human health and social work activities 
Arts, entertainment and recreation 
Other  service  activities;  activities  of  households  as  employers  and 
extraterritorial organisations and bodies 

Missing observations: 

NACE 
B 
C21 
C24 
C30 
C31-C32 
D-E 
I 
J61 
Q 
R 
S-U 

Countries 
LV, SK 
LT 
EE, LV 
LV 
LV 
SK 
SI 
PL 
SI 
BG, PL, SI 
BG, EE, HR, HU, LT, LV 

42 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
Fastest growing sectors 
Source: Eurostat, Statistics | Eurostat (europa.eu), 2017-2021. 

Unit: % growth 

Computations: computed value added growth using Chain linked volumes, index 2015=100. 

Missing observations: 

NACE 
C21 
S-U 

Countries 
LT 
All countries 

Sectors with largest contribution to growth 
Source: Eurostat, Statistics | Eurostat (europa.eu), 2017-2021. 

Unit: % contribution to growth 

Computations: using Chain linked volumes, index 2015=100, computed each sector’s growth in value added, 
divided it by total economy’s growth, and weighted the result by each sector’s share of GDP, based on sectoral 
composition of GDP in 2017. 

Missing observations: 

NACE 
C21 
S-U 

Countries 
LT 
All countries 

Business environment 
Source: Economist Intelligence Unit (2023). 

Computation: Simple average of the following subindicators, each of whom is scored on a scale of 1-5 (Political 
effectiveness: 1-10): Bureaucracy,  Consistency and fairness of the tax system, Corporate tax burden, Corruption, 
Crime, Degree of private property rights protection, Degree to which fiscal regime encourages new investment, 
Distortions arising from lobbying by special interest groups, Efficiency of legal system, Employers' social security 
contributions,  Freedom of existing businesses to compete,   Government regulation, Institutional effectiveness, 
Policy  orientation,  Political  effectiveness,  Price  controls,  Promotion  of  competition  and  curbing  of  unfair 
business  practices,  Protection  of 
intellectual  property,  Protection  of  minority  shareholders,  State 
control/ownership, Tax complexity, Top marginal personal income tax rate,  Transparency and fairness of the 
political system, Value-added tax. 

Spending on education 
Source: Eurostat, Statistics | Eurostat (europa.eu), 2022. 

Unit : % of GDP.  

Government support for business R&D 
Source: Eurostat, Statistics | Eurostat (europa.eu), 2021.  

Unit: % of all funds for R&D. 

Computations: computed the share of government funds for business R&D over the total of business R&D funds. 

PISA scores, mathematics and science 
Source: OECD, PISA - Select Criteria (oecd.org), 2023 and Eurostat. 

Annex: Construction of the dashboard indicators | 43 

Computation: Simple average of mean scores for mathematics and sciences, aggregated using the country-level 
population of 15-year old pupils (Eurostat).  

Share of university graduates in STEM subjects 
Source: Eurostat, Statistics | Eurostat (europa.eu), 2022. 

Unit: % of labour force aged 15-64. 

Firms cooperating with universities 
Source: Eurostat, Link: Statistics | Eurostat (europa.eu), 2020. 

Unit: % of all firms 

R&D expenditure in the business sector 
Source: Eurostat, Statistics | Eurostat (europa.eu), 2022 

Unit: % of GDP 

44 | Growth and competitiveness in Central, Eastern and South-Eastern Europe: The role of innovation 

 
 
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Growth and competitiveness  
in Central, Eastern  
and South-Eastern Europe:  
The role of innovation

January 2025

© European Investment Bank, 01/2025 

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