The Effects of FDI on Innovation Systems in Hungarian Regions: Where is the Synergy Generated?

In this study, we show how internationalization and foreign-owned firms influence
synergies in the regional innovation systems of Hungary. We first distinguish three
innovation system functions (knowledge exploitation, knowledge exploration, and
organizational control) operating in regions and study their interactions using entropy
statistics. The functions and their interactions are measured by analysing the distribution
of firms in terms of geographical location, organizational size (number of employees),
technologies (NACE codes of the OECD), and ownership (foreign versus domestic share
in registered stock) in the 2005. Synergy is defined as mutual information among the three
dimensions; a fourth dimension is added in order to bring internationalization (FDI) into
the model. The factor is relevant since the four-dimensional model explains the GDP
contributions to regional development in Hungary, whereas the three-dimensional model
does not. We find that regional innovation systems in Hungary are self-organized
differently, in relation to a relatively small number of foreign firms. These firms have a
large positive effect on synergy in regions between the Hungarian capital and the Austrian
border. However, FDI has negative effects on domestic synergy in the lagging eastern and
southern provinces of the country.