Will Restructuring Hungarian Companies Innovate? An Investigation Based on Joseph Berliners's Soviet Industry

Based on insights from Joseph Berliner's work on innovation in the Soviet centrally planned economy and its reform variants, we analyze process innovation (technological development) and product development in restructuring Hungarian companies from 1992 to 1995. Using data from a survey questionnaire responded to by 325 Hungarian companies, we conclude that decision-makers recognize the increasing uncertainty in their business environment and respond to it by taking more aggressive strategies. However, Hungarian companies practice product imitation rather than product development as only about a third of the new products introduced are new to either Hungarian or global markets. Furthermore, although technological development is recognized as important, only about a third of the respondents indicate any improvement in the company's technology and, of these, only about a quarter report that the change resulted in an up-to-date technology. Berliner identifies public ownership as a major impediment to innovation and considers the invisible foot of market competition to be a significant incentive for innovation. From cross tabulations of responses to various questions probing a company's implementation of new production processes, we find that foreign-owned companies are more likely to be involved in such activity and, of all companies engaged in this process innovation, state-owned companies find it less profitable than do companies of other ownership types. Regarding research and product development, we find that state-owned companies spend significantly less on applied research than do foreign-owned firms. Measuring exposure to external market competition by export intensity in a sub-sample of the companies, we find that a company with higher export intensity is more likely to introduce minor technological improvements. Although ownership type is not a significant determinant of export intensity, state-owned companies tend to adjust their product lines in foreign markets to compete with other Hungarian companies. Global market competition promotes minor technological development and makes state-owned companies more conscious of product development while public ownership deters process innovation in Hungary. Hence, in transition economies, the imitation stage comes first as restructuring companies try to catch up to world class standards in both technologies and products; however preventing foreign participation in the privatization process is likely to impede innovation and stall company restructuring.