Austria’s R&D spending has risen but reform agenda fails to bite

Austrian industry is in a funk. Exporters fret that they are losing market share, as costs rise faster than those of competitors and productivity growth weakens. Their lack of confidence is also depressing investment, both keeping economic growth sluggish.

“We are losing competitiveness each and every year,” says Georg Kapsch, head of Kapsch Group and the Federation of Austrian Industries.

Business blames government for ignoring the seriousness of the problem, which, if the trend continues, could threaten the foundations on which Austrian postwar prosperity have been built.

Up until now Austria’s Mittelstand of small and medium-sized companies has achieved extraordinary success by exploiting a wide range of export niches, often in machinery, or in parts for German industry, notably in the automotive sector.

Some are technological leaders in their segments but others build on existing research, says Arnold Schuh, director for the Competence Center for Central and Eastern Europe at Vienna University for Economics and Business. “There is a lot of accumulated know-how in the production process. We have always been the cheap Germany. German quality at Austrian prices.”

In addition, Mr Schuh says, Austrian companies have remained intensely customer-focused. “The strong customer orientation from owners [and] managers, to application engineers makes the difference,” he says.

Austria has also been successful at attracting foreign investors, despite its relatively high-cost base. Invest in Austria, the country’s foreign investment promotion agency, had a record year in terms of the number of projects last year, and a record half year until the end of June. Foreign investments this year of more than €100m include Novartis’ new biomanufacturing facility and an expansion of BMW’s diesel competence centre in Steyr.

However, according to competitiveness surveys by the International Institute for Management Development (IMD), Austria slipped this year from 22nd to 26th.

Sluggish productivity growth, leading to rising unit costs, have meant Austrian exporters have lost 5 per cent of their market share since 2012, says the Organisation for Economic Cooperation and Development (OECD) in its latest report on Austria in July.

Business blames a range of factors for this falling competitiveness, led by bureaucracy (especially business permits), the high tax wedge, and poor and too frequent legal changes.

But academics argue that industry itself also needs to up its game if it is going to continue to succeed in the global marketplace.

Karl Aiginger, director of the Austrian Institute of Economic Research, says: “There was some complacency because [the model] worked so well. But now other countries are catching up so we have to go to the top everywhere.”

Mr Schuh agrees. “Our cost advantage is eroding so we have to come up with exceptional products.”

The government has helped by improving the incentives for R&D, in particular by raising the amount of cash or tax credit given to companies from 10 per cent to 12 per cent of the money invested. Austria has raised its R&D spending to 3 per cent of GDP, the fifth highest in Europe, says Mr Aiginger, and even the ambitious target of 3.76 per cent of GDP by 2020 is not out of reach if more private funding can be raised.

Austria also needs new innovative companies. “Regulation and lack of start-up capital inhibit entry of innovative new firms, undermining economic dynamism,” says the OECD survey.

We have always been the cheap Germany. German quality at Austrian prices

There is a burgeoning internet start-up scene in Vienna and the government is making crowd funding easier. From January, only if the company wants to raise more than €5m will it have to produce a detailed stock market prospectus.

Yet, in general, business says the government has done little. In particular, tax reform is seen as a missed opportunity for deep reform of the system, with the Social Democrats and People’s Party able to agree only on a cut in the basic rate.

While applauding the structural reforms that have been launched, Christoph Leitl, president of the Austrian Federal Economic Chamber, says that there is a lot still to do.

“Still on the government’s agenda are important reforms such as those necessary in the pension system, the different levels of administration and fiscal redistribution, the educational system, the change to a more digital economy, and maintaining the momentum on innovation,” he says.