The principal challenge for Hungary is to achieve cohesion with the advanced member states of the EU, and thus being able to improve quality of life. International competitiveness should therefore be significantly enhanced, i.e. it should not and cannot merely be based on low production costs. Hungary is already squeezed in a ‘nut cracker’ formed by advanced countries, on the one hand, and dynamic industrialising countries on the other. The former are capable of controlling international production networks and markets via new technologies, financial muscles and superior business models, while the latter are characterised by extremely low wages and highly disciplined work forces. It is crucial for Hungary to escape this trap. That requires a wide range of technological and non-technological innovations to raise productivity and find new markets. Macro-economic pressures also call for a successful, competitive economy. Hungarian decision-makers do not realise the close links between domestic R&D efforts, innovation and economic performance. Given the lack of an explicit, coherent innovation strategy and the low level of R&D expenditures, overall economic policies – especially macroeconomic and investment promotion ones – and strategies of foreign-owned companies operating in Hungary are likely to play a much more decisive role in influencing economic performance than science, technology and innovation policies. This is not to suggest, however, that it would be worthless to devise and implement a sound, explicit innovation strategy. On the contrary, an astute innovation strategy should be one of the cornerstones of a comprehensive socio-economic development strategy, aimed at speeding up the cohesion process.