Should we worry about Europe in the global innovation race? Lessons from Hungary's experience during the Second Industrial Revolution

In recent years, a popular meme has circulated widely, mocking the European Union's lag in innovation with the caption: "US innovates – China replicates – EU regulates." To me, as an EU citizen, regulations like tethered plastic bottle caps or the mandatory adoption of USB-C chargers signal the EU’s prioritization of sustainability and consumer interests over innovation speed. This approach represents a form of "regulated innovation," aiming to ensure that technological progress is not only swift but also sustainable in the long term.

The McKinsey Global Institute's May 2022 report, "Securing Europe’s Future Beyond Energy: Addressing Its Corporate and Technology Gap," acknowledges Europe's well-deserved pride in its sustainability and social achievements. It highlights that Europe’s socio-economic model has performed well so far. However, the report stresses that current technological disruptions compel leaders to rethink strategies to maintain competitiveness. A significant drawback is that European companies are smaller and less agile compared to their American and Chinese counterparts. As technology increasingly permeates every sector, reshaping competitiveness dynamics, innovation and technological leadership are becoming fundamental to the EU's strategic autonomy.

The report notes that technological shortcomings have resulted in European companies underperforming relative to their U.S. counterparts and investing less in innovation. This has exacerbated the gap between the U.S. and Europe, with much of the disparity stemming from technology deficits. If Europe fails to improve its position in emerging technologies, even leading companies in traditional sectors (e.g., automotive, luxury goods) may see their performance jeopardized. The McKinsey report emphasizes that reducing dependency on raw materials and diversifying sourcing will be critical to the continent's success.

The question naturally arises: should we worry about slower innovation? In exploring this issue, I cannot help but reflect on historical parallels. Can we learn anything from the spread of the Second Industrial Revolution, despite the vastly different world we inhabit today?

Let us first examine the situation of the Hungarian Kingdom during the Second Industrial Revolution.

Hungary in the Second Industrial Revolution

The Second Industrial Revolution (1870–1914) brought unprecedented and rapid transformations to economic and social systems worldwide, albeit unevenly across regions. The electrification of industry, the integration of new industrial materials (steel, petroleum), and groundbreaking inventions (carbon filament light bulbs, dynamos, internal combustion engines, telephones, and mass production techniques) revolutionized production and consumption patterns. Financial innovations, such as the proliferation of universal banks and the introduction of securitization practices to encourage corporate share issuance, also emerged.

The dramatic progress in Western Europe (the UK, Germany, France, the Netherlands, and Italy) and North America had profound long-term economic, military, and geopolitical consequences. By the turn of the 19th and 20th centuries, Europe had solidified its international role, but the global division of labor also entrenched a core-semi-periphery-periphery structure. Central, Eastern, and Southeastern Europe largely belonged to the semi-periphery.

Within the Austro-Hungarian Empire, a developmental divide ran through the Monarchy. The Alpine provinces and the historical Czech regions (Bohemia and Moravia) were industrialized, with processing industries emerging as early as the late 18th century. In contrast, Hungary's western territories only experienced significant industrial growth after the Austro-Hungarian Compromise of 1867.

Research by Klein, Schulze, and Vonyó highlights that more developed regions of the monarchy dismantled feudal structures earlier, fostering non-agricultural production and entrepreneurial activity. Urbanization and higher human capital levels also advanced earlier in these areas. However, the monarchy's regional disparities caused it to lag behind Germany in per capita GDP.

For Hungary, the 1867 Compromise and related reforms established the legal, economic, and social framework for industrialization. Yet, as in many Eastern European and Balkan countries, industrialization did not initially drive economic growth; instead, it was rooted in capitalist agriculture. The global economic division reinforced this trend: rapidly industrializing Western economies provided significant markets for semi-periphery agricultural products. However, the end of cheap serf labor undermined export capacity, creating a need for modernization.

Hungary's industrial development thus relied on agricultural prosperity. This explains why industrial sectors in the monarchy's advanced and less-developed regions diverged, especially initially. While textiles and iron dominated in the Alpine and Czech regions, Hungary's industries focused on food processing (e.g., milling).

The semi-periphery’s defining characteristic was its sequential rather than parallel technological adoption. In core countries, industry, transportation, and financial systems were revolutionized simultaneously, enabling broad technological dissemination. By contrast, the semi-periphery required prior advancements in agricultural capital formation, financial system strengthening, and transportation network expansion (e.g., railways). The shift became evident when Hungarian banks, initially established to finance agricultural credit needs, turned toward industrial investment, and when railway networks began facilitating industrial expansion.

The development of Hungarian industry was significantly influenced by the influx of Austrian capital following the Vienna Stock Market Crash of 1873. While this crisis slowed growth in the Austrian Empire, it provided momentum for industrial advancement in Hungary. Later, the arrival of French and German capital further supported these developments, focusing initially on railway expansion and supplemented by significant state loans.

By 1910, Budapest had grown into an important industrial city, although it still lagged behind Austrian and Czech centers in significance. By 1913, the manufacturing sector accounted for nearly a quarter of the GDP of the Austrian Empire, while in Hungary, its share had risen from 6.5% in 1870 to 14%.

Before drawing lessons applicable to today, it is important to highlight some key differences between the two eras:

1. Potential Speed of Innovation Diffusion

Second Industrial Revolution: The spread of innovations (e.g., electricity, internal combustion engines) was much slower due to underdeveloped infrastructure, limited information flow, and less integrated global markets.

Fourth Industrial Revolution: Digitalization and global communication enable innovations to become almost instantly accessible worldwide. However, EU regulations sometimes slow or guide technological adaptation (e.g., concerns about the introduction of standardized USB-C chargers).

2. Role of Regulation

Second Industrial Revolution: Regulations were largely reactive, introduced after new technologies emerged (e.g., labor protection laws). This approach allowed rapid innovation but often incurred societal costs.

Fourth Industrial Revolution: In the EU, regulations are more proactive compared to the U.S. or China. While this can hinder innovation, it also encourages sustainable technologies through environmental and consumer protection measures, even if it may appear slower.

3. Scope of Technology

Second Industrial Revolution: Innovations were predominantly hardware-based (machines, tools, infrastructure) and required physical labor for installation and maintenance.

Fourth Industrial Revolution: Digital technologies (software, data) demand less physical infrastructure, allowing faster adaptation. EU regulations, such as those targeting USB-C chargers and plastic caps, emphasize sustainability and environmental considerations. As in the Second Industrial Revolution, aligning regulations with technological progress can unlock a new era of growth. The EU appears to be pursuing a stable and sustainable development model, even if it sometimes seems slower.

4. Center versus periphery

Second Industrial Revolution: The Hungarian Kingdom remained a semi-peripheral region within the Austro-Hungarian Empire, relying on Austrian capital and markets.

Today, the EU is not in a similar dependency, acting as a net capital exporter and a global economic player with its own markets and institutional structures. However, to avoid peripheral economic dependencies (e.g., high reliance on technology imports or raw materials), the EU must deepen its focus on innovation and integration.

Lessons from Hungary's Experience and the Core-Periphery Divide During the Second Industrial Revolution

1. Developing infrastructure and human capital is essential: In the Second Industrial Revolution, leading nations were those that built the necessary infrastructure (railways, power grids, factories) and invested in education and vocational training to create a skilled workforce. Similarly, today’s digital innovations—like AI, 5G, and renewable energy—require robust infrastructure and skilled labor to spread effectively. Investments in human capital, including lifelong learning and workforce reskilling, are crucial.
2. Reducing regional disparities is critical: The late arrival of the Second Industrial Revolution to the Hungarian Kingdom and other peripheral nations exacerbated inequalities. Today, equitable distribution of innovations—within the EU and globally—is vital. Ensuring access to modern technologies for less-developed regions is essential to prevent the reproduction of inequalities.
3. Flexibility and adaptation are key: Countries that adapted swiftly to new technologies during the Second Industrial Revolution, such as Germany and the U.S., gained significant economic advantages. Similarly, in the 2020s, rapid adaptation to technologies like AI and green innovations will be decisive. Nations with agile decision-making and regulation will enjoy a competitive edge.
4. Innovation is not just a technological issue but a social one: The Second Industrial Revolution brought social challenges such as urbanization, the rise of the working class, and deteriorating working conditions, which were only addressed post facto. Today’s innovations, such as robotics and AI, also have profound social impacts, like job displacement. Therefore, introducing innovations must consider both technological and societal aspects.
5. Balancing regulation and innovation: During the Second Industrial Revolution, regulations lagged behind technological progress, enabling rapid growth but also causing societal harm. In contrast, the EU’s proactive regulatory approach—while stricter—can help ensure sustainable innovation. Effective strategies for critical industry development and dependency reduction will be key to avoiding technological lag or global marginalization. Promoting technological sovereignty and innovation is essential for long-term success.
6. Thinking in terms of global competition is essential: During the Second Industrial Revolution, establishing international trade relations and accessing global markets provided a significant advantage (e.g., for the USA and Great Britain). Countries (or regions) that opted for isolation were left behind. Adapting innovations requires a clear understanding of the global competitive landscape. For example, the EU is striving to remain competitive with the USA and China, but regional regulations can sometimes be overly localized.
7. The (semi-)periphery in global competition: During the Second Industrial Revolution the Hungarian Kingdom joined the wave of technological advancement later than other parts of the Monarchy, partly due to its semi-peripheral position and economic circumstances. This delay led to a competitive disadvantage in the international arena. During the Fourth Industrial Revolution within the EU, the successor states of the old Hungarian Kingdom operate in a market protected by regulations, but global competition (especially between the USA and China) shapes the direction of innovation. While unified regulations can strengthen the internal market, they may result in slower adaptation to global market trends.
8. The significance of attracting capital and fostering international relation: The influx of Western capital into the Hungarian Kingdom catalyzed economic growth during the wave of the Second Industrial Revolution. This provided opportunities for technological innovations and large-scale industrial development. Today, attracting foreign investments remains a priority for small, open economies, but the focus has shifted toward high value-added sectors (e.g., green energy, digital technologies, modern manufacturing). Simultaneously, mobilizing domestic capital should also be encouraged.
9. The necessity of economic diversification: In Hungary during the Austro-Hungarian Monarchy, economic growth initially relied on a single sector—agriculture. However, during the Second Industrial Revolution, diversifying the economic structure became essential. The integration of industry, transportation, and the financial system ensured further growth. Similarly, economic diversification is crucial for today's economy. To avoid one-sided dependencies, investments should also target sectors that promote sustainability and long-term growth, such as renewable energy, digitalization, and creative industries.
10. The role of the state in economic development: State intervention (e.g., railway development, support for the credit system) played a vital role in industrialization. Without the regulatory and incentivizing role of the state, necessary investments would not have been realized at such a pace. The state remains a key player in fostering innovation today, for example, by creating support systems, developing infrastructure, and incentivizing research and development investments.

The example of the Kingdom of Hungary highlights that development and modernization are often part of a complex ecosystem. Industrialization, the development of transportation networks, the expansion of human capital, and the transformation of social structures all contribute to the successful integration of a country into technological and economic processes. The example from the past also serves as a reminder that countries relegated to the periphery or semi-periphery must pay particular attention to diversifying their economies, fostering innovation, and developing infrastructure to reduce their lag in global competition.

Returning to the current situation of the European Union, it can be concluded that sustainable and regulated innovation is important but insufficient for the continent to maintain its competitiveness in the global technological race. The EU must take proactive steps to promote technological innovation, diversify its economy, and build autonomous industrial capacities. As demonstrated by the Second Industrial Revolution, the key to competitiveness lies in a long-term strategic approach that can integrate various economic, technological, and social dimensions into a common path of development.

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Klein, A. Schulze, M. & Vonyó, T. (2017). How peripheral was the periphery? Industrialization in East Central Europe since 1870. In Hjortsh?j O'Rourke K, Williamson, J.G. (Eds.), The Spread of Modern Industry to the Periphery since 1871 (pp. 63-90). Oxford University Press https://doi.org/10.1093/acprof:oso/9780198753643.001.0001

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McKinsey Global Institute (2022). Securing Europe’s future beyond energy: Addressing its corporate and technology gap https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/securing-europes-future-beyond-energy-addressing-its-corporate-and-technology-gap