Innovation spending in Ukraine doubled in 2024 due to defense R&D

Over the past decade and a half, Ukraine has seen a steady decline in innovation activity. In this case, innovation is defined as new or improved technologies, products or services, as well as organizational and technical solutions that significantly improve the structure and quality of production. In 2010-2021, the volume of industrial spending on innovation in Ukraine decreased by 63% y/y – to $373 million. In pre-war 2021, this figure decreased by 30% y/y.

The full-scale aggression led to an even greater drop in innovation spending by industrial enterprises, which in 2021-2023 decreased by another 49% y/y – to $191 million. The sharp change in the trend in 2024, when this figure doubled at once, looks somewhat illogical. But there is an explanation for this: defense technologies are developing very rapidly in Ukraine, which requires certain research and development (R&D).

Such industries include transport engineering, production of various electronic components and products (drones, REBs and RECs), etc. For your understanding: according to the StateWatch analytical center, the production of drones in Ukraine in 2024 reached 1.7 million units, which is about 1.4 thousand times more than in 2022 (1.2 thousand units), and the production of electronic warfare and electronic warfare equipment – 34.7 thousand units compared to 53 units in 2022.

The share of innovation spending in the structure of Ukrainian GDP has been declining since the mid-1990s. On average, this figure exceeded 1% of GDP. At the same time, in 2023, for the first time since the full-scale war, a slowdown in the negative trend was observed: the share of investment in R&D returned to almost pre-war levels – 0.37% (for comparison: in 2021, it was 0.38%).

Nevertheless, the level remains critically low in the international context, which is to some extent explained by the conditions of war. For example, in 2023, the EU average was 2.22% of GDP, including 1.56% in Poland, 1.39% in Hungary, and 0.52% in Romania. In 2024, the amount of budgetary expenditures in the EU on R&D alone increased by 3.4% y/y – to €127.9 billion, which is equivalent to 0.71% of GDP.  The world’s economic leaders demonstrate much higher rates: USA – 3.6%, Japan – 3.4%, China – 2.6%. According to the World Bank, the global average in 2022 was 2.67%.

Over the period 2010-2020, the share of innovatively active enterprises in the total number of industrial enterprises varied between 13.8-18.9%. A record high level was recorded in 2016. In the pre-war year of 2021, this figure dropped to 9.6% compared to 16.8% in 2020. However, last year, the share of innovatively active enterprises rose sharply to 15.7% from a record low of 8.8% in 2023.

The share of innovative products sold by industrial enterprises in its total volume remains negligible, and in recent years has not exceeded 2%, although we cannot but mention the local maximum in 2024 – 2.8%.

The number of innovative products introduced varies from year to year between 2-4 thousand. It is noteworthy that at the end of last year, their number almost doubled compared to 2021 – to 3382, almost reaching the annual average for the period up to 2021.

The iron and steel sector looks quite attractive against the background of the overall situation with innovations in the industry. In 2024, the share of innovatively active enterprises in the mining of steel ores amounted to 35.3%, compared to 15.7% on average in the industry.

This figure in steel sector is only 9.8%, which is due to the industry’s huge losses as a result of full-scale aggression. The steel industry is operating at a loss, on the verge of survival, and this is not the best time to introduce innovations that are not physically possible. However, the industry is already making plans for post-war recovery, as part of which it plans to carry out a “green” modernization of production facilities, which will cost approximately $11 billion.

In 2024, iron and steel companies spent $1.7 million and $1.3 million on innovation, respectively. Comparing these figures with the pre-war figures (2020) – $13.8 million and $69.7 million, respectively – only emphasizes the depth of the crisis facing the Ukrainian steel industry.