5. The policy mix for FDI-SME diffusion

FDI-SME linkages and spillovers may not take place automatically. Besides economic, market and firm-specific factors, public policy can play an important role. The quality of the regulatory environment and targeted measures at the intersection of investment, SME, innovation and regional development policy areas can determine whether a country can attract productivity-enhancing FDI, and whether spillovers on local SMEs can occur. These policy initiatives cannot be considered in silos but in the framework of an adequate and coherent policy mix (Box 5.1). The main challenge for governments is ensuring that the policy mix is aligned with the country’s economic structure, policy priorities, and economic geography.

This chapter reviews the policy mix for FDI spillovers on Slovak SMEs and identifies areas for policy reform (Table 5.1). It identifies the main FDI-SME diffusion channels and enabling factors that are supported by the Slovak policy framework, and draws comparisons with and examples from other EU countries, in particular Portugal, Ireland and Lithuania, which offer significant opportunities for mutual learning. These comparisons are complemented with a discussion on how the Slovak Republic can support the internationalisation and upgrading of SMEs and use FDI to hasten its transition towards a knowledge-based economy.

The Slovak policy mix seeks to promote knowledge and technology transfers from foreign to domestic firms through measures that strengthen the absorptive capacities of local SMEs and facilitate strategic partnerships and value chain linkages (Figure 5.1). Close to 63% of Slovak policies implemented by Ministries and implementing agencies aim to upgrade entrepreneurial skills and encourage SMEs to adopt new technologies and engage in innovative activities. Strategic partnerships (41%) and value chain linkages (27%) are substantially supported through financial incentives for R&D collaborations, supplier development programmes as well as matchmaking services that reduce information barriers and allow foreign firms to identify local suppliers. A few policies are also available to attract FDI into productivity-enhancing activities (22%) and promote agglomeration economies (25%).

By contrast, a small number of targeted measures is in place to strengthen the labour mobility and competition channels (each accounting for 12% of policy initiatives). This does not necessarily mean that less policy attention goes into these FDI-SME diffusion channels. The mobility of workers and the quality of competition in domestic markets largely depend on the broader regulatory environment, i.e. laws and regulations affecting the labour and product markets respectively, and less so on targeted policies and programmes (see Figure 5.4 for an assessment of regulatory conditions in the Slovak Republic).

When compared to peer EU countries with similar socio-economic and market conditions, the Slovak policy mix does not substantially diverge. It does, however, reflect differences in policy priorities. For instance, the labour mobility channel is supported by almost three times more policy initiatives than in Portugal, Ireland and Lithuania. Shortages of skilled workers and skill mismatches in FDI-intensive sectors have forced the Slovak government to take policy action to simplify employment procedures and facilitate the attraction of foreign talent. Similarly, the share of policies supporting strategic partnerships is higher than in Ireland and Lithuania, reflecting the strategic choice of the Slovak government to boost the country’s transition to a knowledge-based economy by promoting R&D and technology collaborations between business enterprises, universities and research institutions. Knowledge co-creation, i.e. the joint production of innovation between industry, research and other stakeholders of entrepreneurial ecosystems, is increasingly acknowledged as an important mechanism to bring together complementary expertise and facilitate the transfer of tacit knowledge (Kreiling and Paunov, 2021[1]).

One of the major factors influencing the policy mix is the desire and necessity of the Slovak Republic to maintain productivity growth by diversifying its production structure and hastening its transition towards a knowledge-based economy. The fast growth in productivity that took place in the last two decades was largely based on the country’s integration into global value chains (see Chapter 2). Low investment in R&D and business innovation could, however, limit productivity growth going forward. As mentioned in Chapter 2, sustaining past productivity improvements requires the Slovak Republic to strengthen its own capacity to innovate and adopt new technologies. Recent policy efforts have, therefore, focused on diversifying the economy beyond low value added manufacturing and strengthening the innovation capabilities of domestic firms. Despite the policy prioritisation of knowledge-intensive value chain linkages and partnerships, innovation policies could be further improved to integrate national priorities and ensure industry engagement. Similarly, the Slovak economy would stand to benefit from a more diverse set of measures to increase the knowledge-intensity of investments. The share of policies targeting productivity-enhancing and R&D-intensive FDI is considerably lower than in peer EU countries.

Considering the number of policy initiatives that target these policy objectives is only a partial measure of policy focus in a given area. One policy could rely on more resources (e.g. higher budget) for its implementation, and therefore have greater impact, while several policies in another case could be underfunded and not sufficiently effective to achieve the pursued outcomes. For this reason, the policy mix analysis conducted in the following sections takes into account other aspects relating to policy design and implementation, including the sectoral and value chain targeting of implemented measures, the uptake of public support schemes, the number of beneficiaries, the quality of the regulatory environment, and the type of policy instruments used to achieve specific policy objectives, amongst others.

Policy initiatives that aim to strengthen FDI spillovers on SMEs can make use of several instruments (e.g. technical support, financial support, regulatory easing), reflecting the plethora of strategic objectives they may seek to fulfil as well as the many pathways to achieving policy outcomes (Box 5.1). The type of instrument used often varies depending on the institution and the policy objectives pursued (Panel B, Figure 5.1). Overall, the Slovak policy mix is not substantially different from peer EU countries, where financial and technical support as well as information and facilitation services are offered to strengthen FDI spillovers on domestic SMEs (Figure 5.2 and Figure 5.3). Although the number of financial support schemes for business innovation is large – and on par with peer EU countries – their volume is relatively low. This is mainly due to the limited resources allocated through the state budget and challenges in the absorption of EU funds. A comprehensive set of technical assistance, information and facilitation services is, however, available to support the innovation and internationalisation of Slovak SMEs and help foreign investors create linkages with the local economy. The delivery of these business advisory services is, however, fragmented. As described in Chapter 4, many public institutions are involved in their implementation, raising questions about their effectiveness in the development of FDI-SME ecosystems.

An important factor reflected in the chosen mix of policy instruments lies in the Slovak Republic’s smart specialisation priorities, which have led to the targeting of specific types of firms (e.g. SMEs), priority sectors and geographic areas. A high degree of selectivity is consistent with industrial and innovation policy frameworks aimed at smart specialisation, and with current development thought about the role of targeted policy interventions in designing industrial policies for sustainable growth. In the Slovak Republic, the targeting of SMEs is widespread among government agencies. Sectoral targeting focuses mostly on FDI-intensive manufacturing sectors such as the automotive, electronics, chemicals and ICT industries; however many policy initiatives introduced in recent years have shifted their focus to the services sector, which provides opportunities for significant productivity gains (see Chapter 2). Regarding the targeting of less developed regions, there is room to further integrate place-based approaches into policymaking, in particular for programmes financed by the state budget.

In addition to targeted measures that can enhance the impact of FDI on the productivity and innovation of domestic SMEs, the quality of the broader regulatory environment also shapes the potential for FDI spillovers. Host country factors such as openness to foreign investment, fair competition rules, the protection of intellectual property rights, and a labour market policy regime that facilitates the mobility of skilled workers need to be in place for economies to reap the benefits of FDI spillovers.

The Slovak Republic has one of the most open economies in the OECD area (Figure 5.4). Restrictions to investment and barriers to trade are limited while the Slovak government’s overall attitude towards FDI attraction and facilitation is positive, not limiting or discriminating against foreign investors. A range of Slovak laws and regulations has been introduced in recent years to improve the business climate with emphasis being placed on simplifying regulations and reducing the complexity of regulatory procedures. However, according to several OECD indicators, the long-term predictability of regulation affecting the business environment is still weak, legislative processes often lack transparency, and the administrative burden on business is disproportionate. Bureaucracy, lengthy administrative procedures and frequent changes to laws and programme rules are often cited as obstacles for domestic and foreign firms that want to conduct business in the Slovak Republic.

Regulatory barriers to competition are only slightly above the OECD average, reflecting the adoption of good practices in areas related to public procurement rules, the corporate governance of state-owned enterprises and the state’s involvement in business operations. More could be done, however, to streamline the licensing regime for certain economic activities and ease restrictions in professional services, the energy sector and retail trade, which are faced with considerable barriers to entry and conduct restraints. Unnecessary competition-distorting rules in sectors of strategic importance for the Slovak economy could hinder productivity growth, investment and innovation. Finally, the Slovak Republic has a relatively balanced labour market regime that does not impose excessive restrictions to labour mobility, which is an important channel through which productivity spillovers from foreign to domestic firms occur.

Investment promotion and facilitation policies can play an important role in enhancing FDI impacts on SME productivity and innovation by focusing on the attraction of FDI in more productive and innovative activities and in sectors with high absorptive capacities and, therefore, greater potential for spillovers. The quality of the broader regulatory environment can also determine the extent to which foreign affiliates gain access to specific sectors and create linkages with domestic firms.

The Slovak Republic has a relatively open economy for foreign investment

According to the OECD FDI Regulatory Restrictiveness (FDIRR) Index, which catalogues statutory restrictions on FDI such as limits to foreign equity, screening and approval procedures, restrictions on key personnel, and other operational measures, the Slovak Republic has a relatively open economy – on par with peer EU and OECD countries (Figure 5.5). Foreign firms have the right to establish a business enterprise and engage in all economic activities under the same terms and conditions as domestic firms. At the sectoral level, transport, real estate and financial services are the sectors where most restrictions are found. For instance, acquisitions of financial services providers are subject to prior approval by the National Bank of the Slovak Republic, while the Act on Civil Air Transport (143/1998 Coll.) sets out specific rules for foreign entities seeking to provide air transport services. Access to the real estate sector for foreign entities also depends on several business registration requirements, including a mandatory academic recognition procedure for foreign diploma holders before being able to exercise real estate activities (European Commission, 2016[3]).

In 2021, the Slovak government introduced a screening framework for investments undertaken by non-EU/EEA companies, which seek to acquire direct or indirect control over strategic assets in sectors of critical importance (UNCTAD, 2021[4]). The amended Critical Infrastructure Act introduced a requirement to notify changes in the ownership structure as well as any acquisitions exceeding 10% of voting rights or shares for companies operating in the transport, electronic communications, energy, postal services, ICTs, water management, healthcare, pharmaceutical, finance and agricultural sectors. A new screening procedure has been also introduced for ownership changes in the mining, energy, pharmaceuticals, metallurgical and chemical sectors. The Ministry of Economy is responsible for assessing whether the proposed acquisitions disrupt the public order or threaten national security, and submit a proposal to the Council of Ministers on whether certain investment projects in these sectors should be blocked or approved.

Beyond these FDI restrictions, there are also several ‘behind-the-border’ regulations, including restrictions in trade, barriers to competition and other discriminatory measures that influence market access conditions not only in industries where FDI gains access but also in downstream sectors. These regulations can affect the degree of local embeddedness of foreign affiliates and the potential for supply chain linkages with domestic enterprises. In the case of the Slovak Republic, potential behind-the-border restrictions in the services sector could undermine recent policy efforts to diversify the economy beyond low value added manufacturing and towards knowledge-intensive services. According to the OECD Services Trade Restrictiveness Index (STRI), the Slovak Republic’s 2020 score is lower than most other OECD countries, reflecting the country’s relatively open and stable regulatory environment for trade in services (Figure 5.6).

Accounting and auditing services, logistics, telecommunications and courier services are the most open sectors while construction, air transport, architecture and engineering services are the most restricted. Overall, conditions on the entry of natural persons seeking to provide services in the country on a temporary basis remain more cumbersome than international best practice, while rights of access to public procurement are limited to regional trade agreement partners and members of the WTO’s Government Procurement Agreement. Other business requirements also apply in certain sectors, such as depositing a minimum amount of capital in a bank or with a notary in order to register a business, and appointing a company manager who is resident in the European Economic area (OECD, 2020[5]). Despite these sectoral restrictions, the Slovak Republic’s overall regulatory framework for market access remains rather lenient compared to other OECD and EU countries.

Regarding the attraction of productivity-enhancing FDI, the policy mix in the Slovak Republic appears to be less diverse – in terms of number of policy initiatives and type of instruments used – than in peer EU countries. It focuses on financial incentives compared to peer countries such as Portugal, Ireland and Lithuania where regulatory measures and technical assistance are also part of investment promotion strategies (Figure 5.7). However, the Slovak policy mix does exhibit a strong focus on investments that use smart industry technologies with higher potential for knowledge and technology diffusion.

The Regional Investment Aid Scheme is the main instrument used by the Slovak government to support investments that enhance the competitiveness and productivity of the economy (

Table 5.2). The scheme provides aid in the form of grants for tangible and intangible fixed assets, corporate income tax relief, wage subsidies for newly created jobs and discounts in the renting or selling of real estate. Although, the majority of investment projects receive a package of support combining two or more different types of incentives, tax relief has been the preferred type of incentive provided to investors in the period 2008-2019. A recent evaluation undertaken by the Ministry of Labour, Social Affairs and Family Policy found that the scheme has been effective in reducing unemployment rates in economically lagging regions of the Slovak Republic (Box 5.2). However, evidence from an evaluation of the direct and indirect effects of the scheme on FDI suggests that FDI inflows to the Slovak Republic have been significantly and positively influenced more by the grants and wage subsidies rather than the tax relief, which was found to have a negative impact on inward FDI (Bobenič Hintošová, Sudzina and Barlašová, 2021[6]).

These findings deserve further and more thorough study to understand the drivers behind the different impacts of investment incentives on the Slovak Republic’s capacity to attract productivity-enhancing and knowledge-intensive foreign investment. When looking at the design of the tax relief component of the scheme, it becomes clear that the value of the tax allowance is in part determined by a firm’s taxable income, in addition to their expenditure in specific types of investment costs relating to new buildings, machinery and jobs created. This has implications for the type of investors that could benefit from the tax relief; if a loss-making firm makes an investment, their taxable income will be zero, and so will the value of the tax allowance. Excluding loss-making firms may help ensure that only financially robust and profitable firms can benefit from investment aid, but it could also exclude new businesses that are loss-making in their initial years of operation and businesses making innovative investments with a longer investment recovery period. Furthermore, it could have an anti-cyclical effect for investment, i.e. if during a recession profits are lower, the tax allowance granted would be lower too.

The Slovak government could consider undertaking an independent impact evaluation of the scheme’s different aid components to ensure that their targeting and design remain effective in the attraction of productivity-enhancing and knowledge-intensive FDI. Systematic ex-post evaluations could help ensure that the costs of tax incentives, in terms of revenue forgone and potential economic distortions, outweigh their benefits. The complexity of the scheme could be also revisited to increase its transparency for investors. Currently, the tax allowance targets both capital and current expenditure; requires minimum project value; requires a minimum number of new jobs created and only applies to wages of newly created jobs; and varies depending on the type and location of the investment project. All these factors may increase the complexity for investors to understand the amount of tax benefit that they could receive for a project and consider it when making their investment decision, potentially reducing policy efficiency. Publishing detailed information on eligibility conditions and the aid calculation methodology could create more certainty for potential investors.

The sectoral scope of the Regional Investment Aid Scheme illustrates, however, the government’s strategic choice to support FDI-intensive sectors (see Chapter 2) to move higher up the value chain and engage in technologically sophisticated activities with more local content in their products. To benefit from the aid, investment projects should fall under one of the defined investment categories, namely industrial production, technological centres and business services centres, each one of which is linked to priority sectors (e.g. chemicals, electronics, automotive, business services etc.) and relevant smart industry technologies (e.g. robotics, artificial intelligence, big data, cloud, etc.).

A similar pattern in terms of sectoral targeting is observed in the overall policy mix; more than 25% of policies enabling FDI diffusion on domestic SMEs target specific industries (Panel A, Figure 5.8), most of which correspond to the sectors where FDI is concentrated (Panel B, Figure 5.8). R&D-intensive activities such as pre-production services and high-technology manufacturing are also strongly prioritised in the delivery of public support. It is recommended that the current focus on attracting investments in the services sector, such as business services centres, design, marketing, advertising and tourism, is maintained and combined with measures to help domestic firms diversify their operations to match the demand of foreign investors (see section on SME absorptive capacities). Ultimately, the attraction of productivity-enhancing FDI will have to be aligned with the policy imperative to diversify the production structure of the Slovak economy away from low value added manufacturing and towards services.

Serious policy consideration should be also given to helping foreign investors address issues that go beyond reducing investment costs such as facilitating licensing procedures for productivity-enhancing projects. Besides standard grant schemes and tax incentives, many EU Member States offer comprehensive support packages to encourage innovation-oriented investments. Hungary provides special VIP subsidies for R&D investments and strategic agreements individually negotiated with the Hungarian government. Portugal has also introduced several special regulatory regimes allowing investors to benefit from simplified and expedited licensing and administrative procedures, conditional to introducing innovative and technology-based production processes in cooperation with domestic R&D institutions.

In the Slovak Republic, a similar regulatory regime, the Significant Investment Certificates, has been in place since 2002 to enable faster land acquisition processes as well as licensing and administrative procedures for foreign and domestic investors. However, the granting of the certificates is possible only for large investments and investments that create a certain number of jobs. The Slovak government could consider broadening the scope of the scheme beyond employment generation to also target investments of smaller value that contribute to the innovation and internationalisation of the Slovak economy. To this end, complementary conditions for the granting of the special regime could be added, including investing in R&D and applied innovation, producing tradable goods and services in export-oriented sectors, and collaborating with Slovak R&D institutions and/or SMEs. Such an approach would complement ongoing policy efforts to support investments involving smart industry technologies, particularly given that these may require special licensing procedures depending on the type of activity involved (e.g. ICT sector, data centres, connectivity infrastructure).

Policies targeting the absorptive capacity of local SMEs can take many forms (e.g. subsidies, grants, loans, tax relief, infrastructures, training programmes) and target various aspects of SME performance (e.g. access to innovation assets, access to skills, access to finance). In the Slovak Republic, SME absorptive capacities are supported primarily through business consulting services and technical assistance, while a few financial support schemes are in place to support R&D and innovation activities undertaken by SMEs (Figure 5.9). Considerable targeting of SMEs is also observed in the overall policy mix (Figure 5.10). More than 63% of the policy initiatives assessed for the purpose of this study target SMEs only or provide preferential treatment to them in the form of lax requirements and conditionalities and prioritisation in their selection as recipients of public support. Non-corporate entities such as universities, research institutes and technology transfer offices are also significantly involved in policies implemented by innovation-focused government agencies such as the SIEA, SRDA and RA.

According to OECD data, in 2018, the Slovak Republic was among the countries with the lowest level of direct government funding and tax relief for R&D, at a rate equivalent to 0.04% of GDP (OECD, 2021[8]). The Slovak support to business R&D ranks far from top innovators such as the US, Canada, France and Portugal, and has also declined during the period 2006-18, while in the OECD as a whole it increased (Figure 5.11). Difficulties in obtaining public funding (grants or subsidies) are perceived as one of the most important barriers to innovation by SMEs, together with the lack of internal finance and the high costs of performing innovation (Eurostat, 2018[9]) (chapter 2) (Box 5.3).

The largest share of public support to business R&D is indirect (Figure 5.11). The Slovak R&D tax incentive scheme was first introduced in 2015 in the form of a hybrid tax allowance with a volume-based and incremental component; until then, a tax allowance was only available to R&D grant recipients. The allowance increased from 25% to 100% of qualifying expenditure in 2018, and to 200% in 2020. In a recent OECD assessment of the generosity of preferential tax treatment provided to R&D versus non-R&D investments across 48 countries, the Slovak Republic was found to offer the most generous treatment for current R&D expenditure and the greatest incentives to increase its volume, followed by Thailand, France, Lithuania and Portugal (González Cabral, Appelt and Hanappi, 2021[10]). Cross-country differences in the generosity of R&D tax allowances can lead to differences in the cost of capital faced by firms – and subsequently encourage or discourage them from increasing their R&D investment or locating their R&D functions in a given location.

The magnitude of tax support, while small by international standards (in absolute and relative terms) has also increased markedly since the introduction of the hybrid tax allowance scheme, going from EUR 2 million of tax relief in 2015 to EUR 24 million in 2018 (OECD, 2021[8]). This was also reflected in the number of recipients, which nearly tripled during the same period, reaching around 250 recipients. This increase is primarily due to SMEs, whose number increased from around 70 to 202 between 2015 and 2018, accounting for more than 70% of all recipients.

The uptake of R&D tax relief by SMEs is a sign that recent government efforts to support smaller businesses to undertake knowledge-intensive activities have started to bear fruit. However, the share of tax support accounted for by SMEs amounted to 28% in 2018 as compared to 72% for large firms, reflecting the larger volume of R&D investments undertaken by larger – often foreign – firms. This could be due to potential reporting and other compliance constraints that small Slovak firms may face with regard to claiming the tax allowance. For instance, as part of the application process, firms must prove that they perform R&D, publish their R&D projects and separate the R&D costs for each project into individual analytical accounts (OECD, 2021[11]). These requirements may be burdensome for small firms that do not have internal capacities to comply with the necessary procedures. To address these challenges, certain countries offer R&D tax incentives with preferential provisions for SMEs and loss-making firms. The Slovak Republic could consider further adjusting the current framework to make it more attractive to smaller businesses by ensuring that they have access to information and support for the application process.

Direct government funding in the form of grants and loans could be also increased and become better targeted in order to help local SMEs conduct R&D or acquire new technologies that improve their productivity. Direct funding often represents a more discretionary and selective form of public support as it allows governments to target specific areas of research that are considered to offer high social returns – as opposed to tax incentives which are in principle available to all firms carrying out R&D. In the Slovak Republic, direct funding is offered by multiple public bodies but represents only a limited share of the total government expenditure for business R&D (29% compared to 71% for R&D tax relief) (OECD, 2021[8]). The Slovak Ministry of Economy operates an Innovation Fund and an Innovation Vouchers Scheme to support SME innovation projects with a focus on manufacturing industries, and emphasis on creating linkages with higher education institutions and research centres. The SRDA and RA, the two implementing agencies under the Ministry of Education, Science, Research and Sport, also offer R&D grants for scientific research projects, in which SMEs are often involved in cooperation with universities and research centres.

In addition, as a response to the poor development of alternative finance for SMEs, the government has deployed initiatives aimed at stimulating the supply of equity capital. In 2022, the number of these initiatives exceeds the number of those promoting traditional funding sources, such as bank loans (OECD, 2022 (forthcoming)[12]). Recent examples include the Venture to Future Fund (VFF) that aims particularly at premium SMEs at the stage of growth in order to help them fully materialise their potential on international markets (more information available at: ), and the Risk Capital Programme that provides equity or quasi equity investment to start-ups and SMEs wishing to extend their business through development projects or acquisitions. Venture capital investment are made through a specialized subsidiary company, the National Holding Fund (more information available at: ).

Financing support for SME innovation in the Slovak Republic is mainly driven by European funds, for instance the EUR 211 million European Investment Bank Group (EIB Group) support for business, energy efficiency, innovation and digitalisation in 2020 (European Investment Bank (EIB), 26 February 2021[14]). Interestingly, while the Slovak Republic benefits from one of the largest shares of the European Structural and Investment Funds (ESIF) oriented towards promoting Research and Innovation (R&I), the country ranks among the EU member states with the lowest absorption of R&I ESIF.

Despite the number of entities that offer direct funding, the amount of support and the number of SMEs benefiting from it are generally limited. For instance, in 2018-2020, on average 24 SMEs per year benefited from the SRDA’s State Aid Scheme, while the Innovation Fund under the Ministry of Economy signed a funding agreement with only one Slovak SME during the same period (SRDA, 2021[15]; Innovation Fund, 2021[16]). In 2018, 25 innovation vouchers were granted through SIEA’s programmes, although in previous years the number was higher (40-50 per year) (European Commission, 2019[17]). Interviews conducted among agency staff showed that overly bureaucratic procedures and the lack of coordination on the management of EU funds have been major impediments for the effective channelling of financial support to SMEs (see Chapter 4).

To address the challenge of the low absorption of ESIF for R&I, the government and the European Commission recently called upon the OECD to assist in developing an action plan and avoid further decommitments of EU funds, for the programming period 2021-27 (OECD, 2021[18]).

In addition, administrative irregularities linked to the limited human resources of Slovak Ministries and the merger of the Operational Programme Research and Innovation (OP R&D) with the Operational Programme Integrated Infrastructure (OP II) in the middle of the EU programming period have resulted in the cancellation of many funding calls. The institutional and governance reforms proposed in Chapter 4 could increase the efficiency of the Slovak innovation policy system and help channel additional direct funding into policies and programmes that strengthen the productivity and technological capabilities of SMEs.

These financial support schemes could help address current challenges with the absorptive capacities of Slovak SMEs; but they must be also transparent, time-limited and subject to regular reviews in order to ensure that they remain relevant and reflect the latest market developments. Financial incentives are not always cost-effective in inducing firms to engage in innovation and can distort competition (OECD, 2021[19]). The Slovak government should ensure that these schemes address well-identified market failures and are evaluated periodically to ensure that benefits materialise and outweigh the costs. The conditions and criteria for granting financial support should be also clearly defined and rules-based to avoid discretionary and distortive granting decisions.

Policy efforts to improve the innovation performance of Slovak SMEs through technical assistance, information and facilitation services have been more systematic than the provision of financial support for business R&D. Programmes aimed at SME growth and upgrading are administered through the three implementing agencies of the Ministry of Economy (i.e. SBA, SIEA, SARIO), and financed either through the state budget or the EU-funded Operational Programme Integrated Infrastructure (OP II).

In addition to policy efforts aimed at increasing the knowledge intensity of FDI (see section on productivity-enhancing FDI), similar initiatives have been recently introduced to help Slovak SMEs diversify their activities towards high-tech sectors. In 2019, SARIO started providing diversification services to Slovak SMEs that want to expand their operations into the space, aviation, smart mobility and medical technologies industries. The support includes business-consulting services, seminars, matchmaking events and workshops for B2B collaboration. The Slovak economy would stand to gain from aligning SME diversification policies with those seeking to diversify the sectoral composition of FDI towards more productive and knowledge-intensive activities. Given the strong concentration of the Slovak production structure on very few manufacturing industries, SARIO’s diversification programme could place particular emphasis on the services sector, which has greater potential for FDI-driven productivity gains (see Chapter 2).

Furthermore, the SIEA implements two innovation-focused programmes, the national project “Increasing the Innovation Performance of the Slovak Economy” (Inovujme.sk) and the national project “Support for the Development of the Creative Industry in the Slovak Republic”. The two programmes have been successful in providing a variety of business development services (e.g. business consulting, skills development workshops, knowledge exchange and networking events, innovation vouchers) to domestic SMEs and mobilising stakeholders from across the Slovak research and innovation ecosystem. The SBA also operates several business consulting and mentoring programmes that each target different business functions, activities and types of entrepreneurial skills (e.g. start-up support scheme, incubation and acceleration programmes, internship programme). The number of beneficiaries, however, varies and can be limited for programmes that provide technical assistance as opposed to networking events and workshops that generally attract more SMEs. For instance, an average of only 43 SMEs per year benefitted from the SBA’s Start-up Support Scheme in the period 2018-2020 (OECD, 2021[20]).

Overall, the Slovak Republic has put in place a comprehensive set of technical support programmes to improve the absorptive capacities of Slovak SMEs. However, the provision of SME development services by multiple government agencies has contributed to an increased administrative burden on SMEs that have to go through multiple lengthy application procedures to benefit from the various schemes. In a 2018 survey of 1000 Slovak SMEs undertaken by the SBA, the lack of information on the availability of support programmes was described as the most important issue for almost half of survey respondents, while an equal share (45%) assessed the possibilities of SMEs to benefit from public support negatively (SBA, 2019[21]). Increased administrative burden (64%), strict compliance criteria (38%) and lengthy application procedures (37%) were cited as the main barriers to SME access to public support. The same barriers are identified in a more recent survey of 36 Slovak SMEs undertaken by SIEA in 2021, with the majority of respondents suggesting that SME support programmes could reflect market needs better and be less bureaucratic and administratively burdensome (SIEA, 2021[22]).

These findings suggest that there is scope to increase the uptake of business development services among Slovak SMEs by simplifying application procedures and raising awareness about the availability of support. As suggested in Chapter 4, joint programming procedures and the establishment of formal communication channels at the agency level (e.g. shared customer relationship management system) to track the number of unique SMEs that benefit from public support could facilitate coordination and measurement of the actual impact of these policies. The three agencies could collaborate on the development of “thematic” programmes through which they would combine and offer their business development, internationalisation and innovation-funding services as packages, structured around specific factors of SME growth and upgrading (e.g. exports, innovation, technological upgrading, skills development, financial capacity, etc.). Such an approach would also help increase the number of SMEs that receive technical support as they would have to go through a single application procedure to benefit from a range of different services.

Administrative and regulatory burden can also weight on the performance of SMEs, influencing their overall innovation and absorptive capacity. In the Slovak Republic, regulatory reform efforts and initiatives undertaken in the recent years (e.g. lessening restrictions related to product market regulation, namely in areas where health, well-being, or safety could not be jeopardised) have led to some improvements to the business environment (OECD, 2020[23]). The country also compares very well with other OECD countries in terms of stakeholders engagement and especially consultations with businesses.

Nevertheless, some regulatory obstacles still harm business performance in the Slovak Republic, especially for SMEs. The World Bank’s “Ease of Doing Business” index 2020 (World Bank, 2020[24]) highlighted challenges stemming from an inefficient administration, like burdensome procedures for starting a business or granting building permits, areas that are essential for the proper functioning of businesses. For instance, completing the procedures to legally build a warehouse takes 300 days in the Slovak Republic, which is about twice the average time in OECD high income countries (152 days) (World Bank, 2020[25]). Also, the Slovak Republic requires 7 procedures for new businesses as compared to an average of 4.9 in OECD high income countries, while the process lasts over 21 days, as compared to 9 days across the OECD (World Bank, 2020[25]; OECD, 2021[11]). The country’s performance remains weak in this area despite some recent reforms, such as abolishment of the requirement to obtain and submit information on tax arrears in 2019, which speeds up the business registration process (OECD, 2021[11]).

The Ease of Doing Business 2020 also highlighted some strengths. The Slovak Republic ranked 45th among 190 economies in 2020, with an overall score of 75.6 (a 4 points improvement since 2015). Among individual indicators making up the overall score, the country ranked among the top ten countries for ease of administration on trading across borders (1st) and registering property (8th place) (World Bank, 2020[24]).

The potential for FDI-SME linkages can be influenced by the quality of the knowledge transfer infrastructure, which may include technology transfer offices, applied research centres, collaborative laboratories, universities and other facilities that contribute to the creation and diffusion of knowledge through synergies. These facilities provide a physical environment for foreign firms to collaborate with domestic actors, and for local SMEs to access technological premises, equipment, manpower and activities provided by universities and public research institutions that they could not afford independently.

In recent years, the Slovak government has made significant public investments in developing the R&D infrastructure across the country. Over 2007-2013, more than EUR 400 million from the EU Structural and Investment Funds were invested in the construction of science parks and research centres within or around higher education institutions (HEIs) with the aim to promote the commercialisation of R&D results and foster stronger linkages between applied research and business innovation (Balog, 2019[26]). Several parks and universities have also established technology transfer offices, brokerage centres and business incubators to assist local enterprises in innovation activities and intellectual property protection.

Despite these policy efforts, the engagement of HEIs with external actors, in particular the private sector, remains weak. In 2016, Slovak universities derived only 1.9% of their total resources from business research (OECD, 2021[11]). A recent OECD country review of the Slovak higher education system found that the limited autonomy and inward focus of HEIs and the lack of incentives and established communication channels have hampered collaboration with off-campus stakeholders (OECD, 2021[27]). Significant regional disparities are also observed in the availability of R&D infrastructure. Most science parks have been established in and around the Bratislava region, leaving the central and eastern regions of the country without the necessary facilities to support science-to-business collaboration. Similarly, a dysfunctional funding system has affected the use, maintenance and staffing of these infrastructures. In many occasions, universities and the Slovak Academy of Sciences reportedly have had to allocate funding from their own resources to ensure the continuity of the services provided by the science parks and research centres (Balog, 2019[26]). Access of business enterprises to science parks has been also hindered by the state aid rules governing funding calls for collaborative R&D. These regulatory constraints include restrictions to revenue generation from R&D activities supported by public funds, which in effect meant that innovative SMEs and start-ups could not use these infrastructures for R&D projects involving commercial applications or links to the real economy.

Policy efforts should focus on providing incentives to HEIs to engage with external stakeholders, in particular the private sector, and strengthen their role as regional entrepreneurial ecosystem anchors. As part of the Slovak Republic’s national Recovery and Resilience Plan, the government has stated its intention to establish institutional contracts that tie a portion of higher education funding to specific performance criteria contributing to national policy objectives (OECD, 2021[27]). The proposed performance-based funding system is a step in the right direction as it could significantly help universities develop third-mission activities related to innovation promotion and entrepreneurship development. The example of the UK’s Knowledge Exchange Framework presented in Box 5.4 illustrates how competitive funding allocated to HEIs can be an important stimulus for enhancing knowledge transfer to SMEs, in particular if it is combined with a robust monitoring and evaluation framework, quantitative and qualitative metrics and extensive consultation processes with HEIs and business stakeholders. In the case of the Slovak Republic, it will be important to explicitly define the objectives of innovation and knowledge transfer within the strategic documents of HEIs and collect information on their performance to ensure that the impact of their knowledge exchange activities can be evaluated.

The quality of the services provided by science parks and applied research centres could be also improved by ensuring adequate financial and human resources to maintain and expand their operations in the regions in which they are located. Existing rules on the use of these infrastructures by business enterprises should be altered to accommodate R&D activities involving commercial applications and promote genuine collaboration with industry, including foreign MNEs and Slovak SMEs. In addition to providing high value-added business development services, more impact could be obtained by anchoring these infrastructures into regional entrepreneurial ecosystems. Subnational governments, together with universities, cluster associations, the private sector and national implementing agencies, should be involved in formulating the strategic priorities and scope of activities undertaken by science parks and ensure that these are aligned with local market needs and the smart specialisation framework of their regions.

Clusters embed characteristics such as industrial specialisation and geographical proximity that make knowledge spillovers more likely to happen. From a policy perspective, this means that FDI attraction policies, SME policies and cluster development policies could go hand in hand to increase the potential of FDI for SME productivity. Moreover, informing investors about the investment potential of regions and improving the local business climate by adapting policies to the economic and market characteristics of local economies could prove effective.

Several Slovak policies and programmes (25%) involve a place-based approach to the eligibility conditions or the amount of support provided to business enterprises (Figure 5.12). This is particularly the case for investment incentives available to domestic and foreign investors, and certain SME internationalisation programmes supported by the EU Structural and Investment Funds. However, the majority of FDI-SME diffusion policies (75%) apply to all Slovak regions on equal terms, while economic geography factors are not always taken into consideration in the delivery of innovation and R&D support services. For instance, the national smart specialisation strategy does not fully reflect disparities between Slovak regions in terms of specialisation, economic performance and innovation potential (European Commission, 2020[33]).

In terms of regional access to innovation and R&D support programmes, the presence of several SBA and SIEA consultation centres in each of the regions provides some consistency in the availability of innovation support services and reduces potential information asymmetries and gaps in the delivery of state support programmes in the regions. However, these satellite offices are not generally involved in the implementation of regionally-tailored programmes and are often disconnected from regional development actions and strategies implemented by local and regional authorities. A similar picture emerges when looking at the various financial incentive schemes aimed at supporting business R&D. The RA is the only innovation-focused implementing agency that follows a place-based approach by providing R&D grants for enterprises headquartered outside of the Bratislava region. This is due to the role of the RA as the managing authority of the OP II and the EU funding conditionalities that place emphasis on the support of less developed regions. In contrast, state-funded programmes such as the R&D grants provided by the SRDA, the Innovation Fund and innovation vouchers programme of the Ministry of Economy pursue a rather space-blind approach.

Investment promotion and internationalisation policies generally exhibit a higher degree of spatial differentiation than SME innovation programmes. The Regional Investment Aid Scheme applies to all Slovak regions except for the Bratislava area and offers preferential conditions for investment projects implemented in the central and eastern parts of the country with a particular focus on least developed districts (LDDs). Similarly, the EU-funded national project “Support of the internationalisation of SMEs 2017-2023”, which is jointly implemented by the SARIO and the SBA, seeks to attenuate regional disparities by providing support to firms headquartered outside of the Bratislava region. In 2019, 209 SMEs from Western, Central and Eastern Slovakia were supported through supplier development workshops, seminars and business networking events (see section on value chain linkages) (SBA, 2020[34]).

Efforts to address regional inequalities have intensified over the past decade. In 2015, the Slovak government passed the Law on the Support of Lagging Regions (Act No. 336/2015), which has led to the recognition of 18 least developed districts (LDD) in Central and Western Slovakia, where the unemployment rate is 1.4 times above the national average (Government of the Slovak Republic, 2021[35]). Regional Councils consisting of local government representatives, businesses, non-governmental organisations (NGOs) and other stakeholders have been established in each LDD, and tasked with preparing Action Plans on the basis of which financial support is provided for the implementation of measures at the district, regional and national level. However, the primary objective of these plans is to reduce unemployment in districts with the weakest economies, and their focus tends to be more on infrastructure, welfare and educational issues rather than directly on investment promotion and SME development (OECD, 2021[11]). It is also unclear whether the main national implementing agencies responsible for investment, SME and innovation matters are involved in the implementation of these plans through their satellite offices.

Overall, in the Slovak Republic, the policy thinking around regional development appears to focus more on employment generation and the support of areas with high unemployment rate, and less so on innovation and technology diffusion. Linkages between regional development action plans and the needs of local FDI-SME ecosystems could be strengthened to ensure that measures relating to the attraction of knowledge-intensive investment, SME innovation and internationalisation are part of broader local economic development strategies. The satellite offices of the main implementing agencies could be more involved in the deliberations of Regional Councils and play a greater role in tailoring national policies and programmes to the economic and market conditions of each region. The role of Regional Councils as platforms of coordination and engagement of various stakeholders could be also further strengthened to foster greater commitment and synergies across the public and private sectors.

The number of industry cluster initiatives has gradually increased over the past decade, reflecting the importance that the Slovak government ascribes to the role of networks in creating, accessing and sharing new knowledge. There are currently 16 certified cluster organisations, spanning several industries (e.g. IT, automotive, engineering, plastic products, and tourism). Until recently, there was a lack of systematic public support for the integration of clusters into broader regional and local entrepreneurial ecosystems. However, in recent years, the SIEA and the Ministry of Economy have increased the resources dedicated to the support of business networks. There has been also greater involvement of cluster organisations and their representatives – such as the Union of Slovak Clusters – in the design of public support programmes. In 2020, a working group consisting of the SIEA and representatives of industrial clusters was involved in the preparation of a Business Networking Support Scheme.

The increased policy attention that business networks receive is also demonstrated by their international recognition. In 2018-2020, more than 23 Slovak clusters were awarded a certificate of excellence by the European Secretariat for Cluster Analysis (ESCA). This was possible through a SIEA certification programme that helps clusters improve their organisational capacities and join international networks. The SIEA also operates a monitoring platform, which includes presentations of cluster organisations, data on their contribution to the socio-economic development of Slovak regions as well as information on national and international support programmes.

These policy initiatives provide a solid basis for the development and integration of existing and new Slovak clusters into international business networks; however, more impact could be obtained through a more comprehensive approach built around support platforms that integrate regional and sectoral priorities, keep regional and local actors involved, and take into account the diversity of local business environments. The Portuguese case study summarised in Box 5.5. represents a good example of how public support to cluster development can be provided in a systematic and comprehensive manner by integrating clear-cut targets, a diverse range of support instruments – including reforms to the regulatory environment – and a robust monitoring and evaluation framework to ensure the alignment of policy initiatives with regional and sectoral needs. In particular, in the Slovak Republic, there is need to further involve regional and local governments as well as universities and research institutions in cluster initiatives with local businesses, and provide them with the necessary resources to ensure their operational autonomy. The SIEA could leverage the existing working group for the development of dedicated multi-year action plans for each certified cluster organisation.

FDI facilitation and aftercare services as well as supply chain development programmes can be instrumental in encouraging greater embedding of foreign affiliates in local economies and building relationships that contribute to greater use of local SME suppliers. The Slovak Republic has a comprehensive set of policies and programmes to promote supply chain linkages and partnerships between foreign firms and Slovak SMEs. Most of these programmes rely mainly on the provision of information and facilitation services rather than financial support (Figure 5.13). SARIO provides matchmaking services through several programmes that target foreign firms and their affiliates, including the flagship Business Link events and Slovak Matchmaking Fairs, which are implemented under the auspices of the Ministry of Economy. Several sourcing and cooperation events are also organised throughout the year as part of the National project “Support of the internationalisation of SMEs 2017-2023”, geared to strengthen the internationalisation capacities of SMEs and help them access global value chains (GVCs). Many of these matchmaking services target FDI-intensive sectors, focusing in particular on manufacturing (e.g. engineering, automotive, transport, chemicals, and energy).

In recent years, investment facilitation and aftercare services have focused on encouraging foreign and domestic firms to collaborate on the implementation of R&D and technology-based projects. SARIO has established an Innovation Services Platform, which connects some of its most technologically advanced foreign clients with innovative Slovak firms to undertake R&D. These information and facilitation services are not coupled with financial support. In the Slovak Republic, financial incentives for R&D collaborations remain limited in terms of volume and do not always involve foreign affiliates. This is linked to the overall weak performance of the Slovak innovation policy system as well as inefficiencies arising from the poor management of EU funds. Although both the SRDA and RA offer R&D grants for projects implemented by multiple entities, their scope can be limited to collaborations between research institutions and Slovak-owned firms only, while in some cases the actual number of beneficiaries from business – as compared to research institutions and universities – is small.

The Slovak Republic could benefit from re-balancing its policy mix beyond information and facilitation services and towards policies that allow foreign and domestic firms to access the necessary technical support and finance for the development of products and services through science-to-business (S2B) and business-to-business (B2B) collaboration. The SRDA and RA should ensure that foreign affiliates are aware of and have access to the grant schemes made available from the state budget and the EU funds for collaborative business R&D activities. The establishment of the SARIO Innovation Services Platform is a step in the right direction but it could be further leveraged to strengthen coordination between the various actors involved in FDI promotion and innovation policy (e.g. SARIO, SIEA, SRDA and RA) and ensure that SARIO clients are offered access to public support schemes provided by other government agencies. The platform could move beyond matchmaking services and also serve as an “one-stop-shop”, connecting foreign affiliates and innovative Slovak firms with advisors in other parts of the Slovak government, subnational authorities, clusters, industrial parks as well as R&D and technology-focused universities.

Regarding supply chain development, policy efforts are fragmented across multiple institutions and lack a comprehensive approach. As part of the national project for the internationalisation of SMEs, SARIO implements the Supply Chain Development Programme, aimed at increasing the involvement of Slovak SMEs in domestic supply networks. However, the programme has so far focused only on collecting information and building a database on the needs of original equipment manufacturers (OEMs) and the capacities of Slovak SMEs. An Exports Academy also operates within SARIO, organising seminars, practical trainings and knowledge exchange workshops to help Slovak entrepreneurs improve their sales strategies. Other important actors in the delivery of SME internationalisation services include the SBA, which provides advisory services through their Growth Programme to help SMEs penetrate foreign markets; and the POCE Business Centre in the Ministry of Foreign Affairs, which operates the “Let’s do business abroad” portal with information about tenders, fairs, exhibitions and new business opportunities involving foreign firms.

A more comprehensive approach to supply chain development will be necessary for Slovak SMEs to reap the benefits of FDI spillovers. SARIO’s Supply Chain Development Programme could be expanded to provide a package of support for clusters and networks of foreign and domestic firms operating in specific value chains. The Supplier Clubs programme implemented by the Portuguese investment promotion agency (AICEP) is a good example of how public policy can mobilise actors across the business ecosystem to help local SMEs collaborate with foreign affiliates. The programme combines matchmaking services to help foreign and domestic firms identify collaboration opportunities and agree on jointly implemented projects; business consulting services and training programmes provided by foreign affiliates to their suppliers based on an assessment of the latter’s performance; and financial support through EU-funded incentive schemes to help SMEs upgrade their technological capabilities for the implementation of the agreed joint projects. Such a systematic approach to value chain building in the Slovak Republic will require the use of a more diverse range of policy instruments and greater coordination among the agencies involved in investment promotion and SME growth policies.

Productivity spillovers from labour mobility depend on the quality of labour market regulations and the availability of policies and programmes that encourage the movement of workers from foreign MNEs to local firms. Striking the right balance between employment protection and adaptable labour markets, while incentivising the mobility of skilled workers in sectors with considerable FDI presence through targeted measures can contribute to greater spillovers on local economies.

In the Slovak Republic, labour market policy has primarily focused on removing domestic barriers to labour market participation and addressing labour shortages particularly in the IT and manufacturing sectors where most FDI – and therefore demand for skilled workers – is concentrated. In 2018, the government adopted a Strategy on Labour Mobility of Foreigners, outlining various short- and long-term measures including: a quarterly update of the list of sectors with labour shortages; a review of the conditions for granting temporary residence permits; a simplified procedure for filling designated scarce jobs in districts with unemployment levels below 5%; and measures to reduce red tape in the recognition of foreign education credentials (Government of the Slovak Republic, 2018[37]). Various ministries have been responsible for the creation of more flexible regulations that would enable employers to hire foreign workers more efficiently.

The Slovak regulatory framework seems to attach equal importance to firm adaptability and job security. According to the OECD indicators of Employment Protection Legislation (EPL), in the Slovak Republic, restrictions to individual and collective dismissals of regular workers are on par with the OECD average (Figure 5.14). In contrast, the regulatory setting for hiring temporary workers is stricter than the rules for regular workers, and above the OECD average. Stricter rules for hiring temporary workers are usually used by governments to encourage the uptake of permanent employment and counteract potential overuse of temporary contracts by firms (OECD, 2020[38]). In the aftermath of the 2008 global financial crisis, a number of OECD countries, including the Slovak Republic, introduced a legal limit for the cumulated duration of temporary work assignments.

The overall balance of the Slovak regulatory framework points towards potential benefits from the presence of FDI through labour mobility; however, these are more likely to occur in regions and sectors with high SME absorptive capacities. Recent evidence from EU countries shows that labour markets with strong absorptive capacities are better positioned to moderate any adverse labour market effects of FDI, in particular the crowding out of employees in domestic firms, which occurs either directly when foreign and domestic firms compete for the same scarce labour resources or indirectly when foreign firms offer higher wages to attract highly skilled workers (Becker et al., 2020[39]). These findings highlight the need to examine labour market regulations and their role in FDI-SME diffusion by looking at how they relate to other drivers of labour mobility, namely the absorptive capacity of domestic firms and the availability (or lack) of skills in the local labour force. Despite the conduciveness of the regulatory framework and the inflow of foreign workers following the simplification of employment procedures, labour mobility from foreign to domestic firms will not be fully leveraged in the Slovak Republic unless structural challenges linked to the absorptive capacities of local SMEs are addressed (see section on SME absorptive capacities).

Linked to the capacity of domestic firms to retain and attract highly skilled workers is the complexity of hiring regulations and the disproportionate impact they may have on SMEs. Findings from an analysis of labour legislation undertaken by the SBA indicate that employment laws have changed on average 36 times per calendar year between 2016-2020 (SBA, 2019[21]). Interviews conducted as part of the 2021 OECD review of SME and Entrepreneurship Policy in the Slovak Republic also revealed that hiring the first employee is especially costly for Slovak micro firms, who often opt for subcontracting to a self-employed contractor instead of hiring a new employee (OECD, 2021[11]). The Slovak government could consider streamlining the labour legislation and introducing targeted measures that allow micro and small firms to be exempted from certain procedural requirements or other hiring restrictions of the labour code.

Targeted employee exchange/secondment programmes and other incentives could be also used to foster productivity spillovers from labour mobility. In Portugal, the Portuguese investment promotion agency (AICEP) implements the INOV Contacto programme, which allows highly skilled young graduates to conduct a short-term internship in a Portuguese company, followed by a long-term internship in a foreign multinational. Although these programmes do not affect the overall labour market conditions, they can provide a more targeted approach to facilitating the transfer of knowledge and skills from foreign firms to local labour markets. SARIO, in collaboration with SBA, could consider developing an employee exchange programme involving foreign affiliates and Slovak SMEs. Additional measures such as incentives for corporate spinouts could also allow employees of domestic MNEs, including foreign affiliates, to create their own start-up. Payroll tax incentives for highly skilled or R&D workers could also encourage domestic SMEs to hire qualified employees with prior experience in multinational firms.

Encouraging the uptake of permanent employment, as done by the Slovak government, can have a positive impact on Slovak firms’ willingness to invest in job training of their employees, which is an important component of a firm’s absorptive capacity. Evidence on the role of employment protection regulations in shaping the incentives of firms to invest in formal training shows that enforcing stricter hiring regulations for temporary contracts and less rigid regulations for dismissals of permanent workers (as is the case in the Slovak Republic) is associated with higher investment by firms in the human capital of their employees (Almeida and Aterido, 2011[40]). In contrast, overly restrictive dismissal regulations combined with low regulation of temporary contracts (e.g. Portugal) may lead to reduced investment in job training.

As described in Chapter 2, domestic SMEs still face considerable challenges to invest in job training despite the emphasis that the Slovak government has placed on skills development. A major overhaul of the national vocational education and training (VET) framework took place in 2015 with the introduction of a dual education system that aimed to foster greater collaboration between employers and vocational schools (European Commission, 2019[41]). The reform included simplified registration requirements for SMEs participating in the dual system, tax and other financial incentives for employers that provide practical training, and additional funding to VET schools. VET programmes targeting eligible job-seekers (e.g. REPAs+, KOMPAS+) were also introduced to boost the participation of the unemployed in (re-)training activities, with recent evaluations showing positive outcomes on participants’ employment situation (Štefánik, 2018[42]; OECD, 2020[43]). Since the introduction of these measures, participation of Slovak SME employees in vocational training programmes has increased, accounting for roughly 32% of students entering vocational learning programmes in 2019 (as opposed to a 15-20% share in 2015-2017) (European Commission, 2021[44]). New enrolments of apprentices have also quadrupled from 422 in 2015 to 1615 in 2019 (European Commission, 2020[33]).

The 2030 Digital Transformation Strategy and the related Action Plan for the period 2019-2022 are the most recent strategic documents that seek to define policy priorities as well as specific actions to reform the education system, introduce lifelong learning and VET programmes, and improve digital skills in the labour market (Government of the Slovak Republic, 2019[45]). A National Coalition for Digital Skills and Jobs was also set up to mobilise representatives of the public and private sectors, academic institutions and civil society to improve the digital skills of students, employees and IT specialists. However, in the Slovak Republic, strategies, policies and reforms tend to be well developed and comprehensive, but their implementation is often comparatively weak.

To address skill shortages a whole-of-government approach is required given the cross-cutting nature of the skills agenda (OECD, 2021[19]). Linkages with other policy areas should be strengthened to ensure that educational, vocational and training programmes are not implemented in silos but are aligned with the Slovak strategies for smart specialisation, innovation and entrepreneurship. The programming of the EU funds for the period 2021-2027 offers the opportunity for a better alignment of policy priorities across these areas. Moving forward, active labour market policies could be further aligned with skills upgrading programmes, and be coupled with investments in human capital development within SMEs and in the general workforce.

Competition rules that ensure a level playing field for foreign and domestic firms can facilitate the entry of foreign investors and, at the same time, incentivise domestic firms to become more productive and improve the quality of their products (Lembcke and Wildnerova, 2020[46]). Policies that ensure intellectual property (IP) rights protection are also important as they guarantee the appropriability of knowledge and innovation benefits, and determine the qualities of FDI that can be attracted.

According to the OECD Product Market Regulation (PMR) indicators, which measure the degree to which laws and policies promote or inhibit competition, regulatory barriers to competition are slightly above the OECD average in the Slovak Republic (Figure 5.15). Public procurement rules, the regulatory procedures, use of command and control regulation, the corporate governance of state-owned enterprises, and the assessment of the impact of new regulations on competition are all relatively close to international best practices. In contrast, public ownership of the largest operators in network sectors is higher than in many other OECD countries, the licensing regime is burdensome and there is scope to improve the rules regulating the interaction between interest groups and public officials. For instance, policymakers are not required to make their agenda available to the public, nor to disclose the identity of the interest groups they meet. However, there is a compulsory cooling-off period for public officials when they leave their post, as well as regulation dealing with potential conflicts of interest. Moreover, a Code of Conduct for civil servants, including rules for accepting gifts and other benefits, entered into force in January 2020.

The Slovak Republic’s PMR score indicates that there is scope to further improve its performance in the area of administrative and regulatory burden on start-ups. Several reforms have been introduced in recent years aimed at the simplification of business processes. This included the abolishment of the requirement to obtain and submit information on tax arrears, which aimed to speed up the business registration process; the creation of a new corporate structure, the simplified joint stock company, which allows new corporations to be registered with a minimum capital share of 1 EUR; and a draft amendment to the Income Tax Act to make it easier for Slovak SMEs to comply with tax obligations (OECD, 2021[11]). A Better Regulation Strategy (RIA 2020) was also adopted by the Slovak government in 2018 in order to improve the quality of laws, eliminate redundant regulation and reduce bureaucratic complexity. Although the RIA 2020 Strategy is a comprehensive better regulation policy effort in accordance with international best practices considerable delays have been observed in the implementation of specific commitments so far (OECD, 2020[47]). Implementation challenges could be addressed by targeting the most urgent areas of reforms, choosing priority areas for action and complementing the strategy with an action plan with a realistic timeline.

At the sectoral level, the regulatory framework in the e-communications sector is more competition-friendly than in most other OECD countries, but less so in the energy and some of the transport sectors (Figure 5.16). This is due to the presence of state-owned enterprises, for example in the electricity, gas and retail sectors, and regulation that is not in line with international best practices. Professional services are among the most regulated in the OECD area, in particular notaries, architects, and civil engineers. Regulatory barriers to competition in retail distribution are also above the OECD average, though less so in the retail sale of medicines. For example, special administrative requirements apply for the establishment of large-scale outlets and shop-opening hours are more regulated than in many other OECD countries. When firms are subject to overly restrictive entry restrictions and onerous rules for conducting their business, a lack of competitive pressure may induce them to charge above-market prices, provide sub-optimal services and fail to adapt to market changes and innovation.

The Slovak legal framework for intellectual property (IP) rights protection generally complies with European and international standards. The Slovak Republic ranks 60th out of 141 countries in terms of IP protection in the World Economic Forum’s 2019 Competitiveness Report, and 39th out of 131 economies in the Global Innovation Index 2020 prepared by the World Intellectual Property Organisation (WIPO), INSEAD and Cornell University (World Economic Forum, 2019[48]; Cornell University, INSEAD, and WIPO, 2020[49]).

The registration of IP rights is done through the Industrial Property Office (IPO), which is the official government agency responsible for industrial property protection, including inventions, industrial designs, trademarks and geographical indications of origin. The IPO operates several Patent Information Centres and Contact and Information Points, which offer information and advisory services on IPR issues, raise awareness among business enterprises and research institutions about the benefits of IPR protection, and make available relevant documentation. An online portal has been also in place since 2008 to streamline information on all matters regarding intellectual property in the Slovak Republic and abroad. Recently, the IPO established a network of Information and Advisory Points for Innovation (INNOINFO), which are established in business incubators, regional advisory and information centres, technical universities and the regional departments of the Slovak Chamber of Commerce and Industry (SCCI). The INNOINFO network specifically targets SMEs and entrepreneurs and delivers business diagnostic services.

The protection of IP rights is enshrined in several legal instruments such as the Patent Act, and the Copyright Law, as well as in general pieces of legislation including the civil and criminal codes. Coordination is ensured by the Inter-ministerial Commission for the Fight against Counterfeiting and Piracy, which gathers representatives of several line ministries, the General Prosecutor’s Office, the IPO and the Slovak Trade Inspection Authority. Established in 2011, the Commission coordinates policy issues relating to infringements of IP rights, monitors the implementation of the national anti-counterfeiting strategy, organises information campaigns, and provides training to relevant public and private sector entities.

The Slovak Republic does not have a specialised intellectual property court as is the case in other EU countries; general courts have jurisdiction to rule on all matters relating to infringements to IP rights. Alternative dispute resolution (ADR) procedures are not mandatory, and therefore not commonly used in relation to IP rights disputes. The general lack of awareness and weak ADR culture, coupled with the insufficient degree of specialisation of judges could put pressure on civil courts and increase the backlogs of cases piled up on their calendars (SBA, 2020[34]). Some countries, like Italy, have taken initiatives to support the development of ADR systems and introduced a requirement to undertake ADR sessions before any court proceedings as a way to unburden court systems. In Portugal, a specialised IP court has been established to address the considerable delays in the procedural stages and decision of cases involving the enforcement of IP rights, while a state-supported Arbitration Tribunal has jurisdiction to resolve solely IP rights disputes. In the Slovak Republic, efforts to improve the efficiency of the judicial system have picked up over the past decade with the introduction of hosting judges to address temporary workload challenges, legislative measures to de-register old inactive cases, and efforts to increase the use of IT tools in courts (European Commission, 2020[33]). The Slovak government could consider taking additional steps to raise awareness of ADR procedures to improve the settlement of IPR-related disputes.

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