HUMAN CAPITAL, INNOVATION, KNOWLEDGE Innovation Policy Challenges in Transition Countries: Foreign Business R&D in the Czech Republic and Hungary Bala ´zs Lengyel Æ Vladislav Cadil Received: 7 July 2008 / Accepted: 28 October 2008 Ó Springer-Verlag 2009 Abstract R&D expenditures of national firms decreased considerably and struc- tural changes of R&D financing followed the fall of planned economy in the transition period of Central Eastern European economies. In the middle of the 1990s, business R&D started to grow in the Czech Republic and Hungary due to investments of foreign affiliates and restructuring of domestic companies. Nowa- days multinational companies have a decisive share in business R&D in these countries, which entails special challenges for national innovation policy. In this paper, we look through the development of the Czech and Hungarian innovation policy considering MNEs R&D. We use case studies of the Czech automobile industry, the Hungarian pharmaceutical industry, and the new MNE-related uni- versity units and private universities to show how these companies influence innovation systems in transition economies. Keywords R&D Á Innovation policy Á Foreign-owned companies Á Transition economies Á University-industry relation JEL classification O32 Á O38 Á R11 Á R58 Introduction Innovation, research and development (R&D) play a crucial role in contemporary economic policies and strategies. The European Union having launched the Lisbon B. Lengyel (&) Institute for World Economy, Hungarian Academy of Science, Budapest, Hungary e-mail: blengyel@vki.hu V. Cadil Technology Centre AS CR, Prague, Czech Republic e-mail: cadil@tc.cz 123 Transit Stud Rev DOI 10.1007/s11300-009-0046-5