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Moments of the 2nd NRG meeting
The 2nd NRG meeting of the Hungarian IFD Group was held on 12 September 2002 in
the Corinthia Hotel Acquincum, Budapest. 23 members of the National Reference
Group attended the event. Some of them were not present at the 1st meeting. The
event was started with the introduction of Mr. Miklos Szanyi at 10.00 A.M.
Mr Szanyi introduced the topic with the notion that there are important changes in the
structure and function patterns of the Hungarian economy. The two most important
features being 1. the withdrawal of the state from direct economic (business)
participation, and 2. the unprecedented before high influence of foreign owned
companies. It seems, that a new pattern of economic development was started in
Hungary. The question was raised if state economic functions can or can not be taken
over by private (foreign) business? Obviously, there is only limited overlap of the
state’s economic tasks and what foreign business can and is willing to do in order to
fulfill national development targets. Thus, a reconsideration of state roles seems to be
unavoidable.
The next question is how effectively foreign companies may deliver modernization
effects to the Hungarian economy? Many of the direct effects seem to bring both good
and bad results. For example, increased competition forced many Hungarian
companies to restructure activities, but even more could not cope with the challenge
and exited the markets. Concerning indirect effects, the picture is even more scattered.
Mr. Szanyi concluded, that foreign firms’ indirect spillover effects may affect
Hungarian companies only, if there is an intensive link between donor and recipient,
be it a competitor status, or strategic partnership. If firms do not meet on markets,
there is no interface for the to transfer spillover effects.
Thus, the limited scope of spillovers experienced until recently raises the question if
the current strong duality of the country can be limited in future? The answer was
ultimate yes. An analysis of foreign investors proved, that in terms of employment,
number of business entities or invested capital, a relatively small group of foreign
firms belongs to strictly regulated international corporate production networks, that
seem to be not contestable for Hungarian suppliers. The overwhelming majority of
foreign firms can incorporate domestic deliveries and may develop local linkages. It is
a primary task of the economic policy to enhance the linkage development. The first
attempts in this direction did not bring a breakthrough, though.
After this introduction an interesting debate evolved that focused mainly on the topic
of spillover effects, and the usage of FDI promotion tools.
Mr. Tamás Csányi (Budapest University of Economics) said that despite of the
withdraval of the state from the economy, the level of state sector employment
(bureaucracy) did not change. The declining performance and maintained flow of
wages means an important deterioration of efficiency of state bureaucracy, which
negatively affects the country’s international competitiveness. He also drew the
attention on the fact, that there are at least 30 multinational companies worldwide the
sales turnover of which is bigger, than the GDP of Hungary. This means that the
Hungarian government can hardly influence investment decisions of these firms.
Mr. Robert Kassai (Chamber of Private Craftsmen) cited parts of the Chamber’s own
study on the relationship of economic policy and small business. He said that on a
number of fields FDI brought spectacular positive results. An improvement of
production structure, quick development of the telephone system, the end of strong
geopolitical dependence from the East were especially important in this respect. But
the strong positions of foreign firms causes many difficulties for small business,
because it is foreign management that decides on most important corporate decisions
of foreign firms, neglecting the interest of other Hungarian ventures. They are also at a
more advantageous position, because they are better capitalized and have more access
to outside finance as well. Especially sad Mr. Kassai said, that the Hungarian
government subsidizes foreign investments against Hungarian ventures. The current
system of investment incentives provided HUF 93 bn subsidies to foreign investments
of HUF 530 bn, meanwhile the 276 bn Hungarian investment performance was
honored only by HUF 7,4 bn. This practice seriously undermines the otherwise also
not too favourable competitive position of domestic venture, he stressed.
Ms. Zsuzsa Szabó (CSO) said that the current economic development path of the
Hungarian economy has been decided for a longer period of time. The impact of
globalization, the role of foreign firms in the economy and the approaching EU
accession are all parts of this process. She also stressed, that the early aspects and
functions of FDI changed, and FDI policy should also be changed accordingly. Thus,
aspect of privatization and urgent needs of cash revenue in the budget, as well as the
balancing role in the current account should give more room for other policy aspects.
Ms Andrea Elteto meant that there has been a change of development model in
another sense too. Beginning with 1998 Hungary became a net capital exporter
country. The direct investment outflow is carried out by traditional Hungarian firms,
albeit to some extent in foreign ownership now (listed on the Stock Exchange firms).
She also stressed, that duality of the Hungarian economy should be approached from
an intra-sectoral aspect. Differences between sectors are visible in all developed
economies as well.
Mr. Andras Edelenyi from Schneider Electric Corp. stressed that investment
motivation is always based on business calculations. Investors search for high capital
return opportunities at low risk level. There are a number of valuable assets that can
be used to increase the return on investment. For Hungary it is the relatively cheap,
productive skilled labor. In order to secure investments and avoid their „footlessness”
countrie have three options. Either to have big enough local markets that can be
served by the local affiliates, but Hungary is too small from this viewpoint. Or a
country may also attract strategic corporate activities, that require special skills and
knowledge. A third option is to attract such big quantities of productive capital, that
are difficult and expensive to move. The latter two options are viable for Hungary as
well. A third positive option may be specialization on niche markets with relatively
lower level of production and sales.
Mr Edelenyi also sketched his view on the nature of foreign owned companies. He
argued that besides the nationally owned firms, there are two different types of
companies that are active internationally. The first type may be called multinational,
meaning a firm with one headquarters, CEOs of the same nationality, and with a
strategy which is to some extent determined by the national aspects of the home
country. These firms are less effective in their international operations exactly because
of their nationalist determination. They are also less likely to settle strategic
competencies elsewhere than the location of the headquarters. In contrast, the global
company is not biased by any kind of national sentiment or determination. The global
company is able to source all kinds of activities internationally, also key
competencies, and this makes them more competitive.
The Hungarian FDI policy should be targeted at attracking true global investments by
offering a variety of valuable assets also for key strategic functions. It is also
important to locate investments on the „source side” of the international business, and
not to the „sales side”, thus contributing to income and added value generation rather,
than to spending the income for products and services obtained from outside of the
country. Mr Edelenyi also thought that FDI was especially useful from two aspects. It
limited the previous strong one-sided dependence of the Hungarian economy and
replaced it with a more diversified international cooperation network. A second
important benefit was the transfer of important technical and managerial knowledge.
From the point of view of knowledge transfer he meant global firms be more likely to
allow local managers promoted to CEO position.
Ms. Mariann Farkas (CBS Consulting) also emphasized that a change in the nature of
FDI policy is required. It must be adjusted to the current needs of the country, as well
as to the requirements of the European Union, since the Hungarian joining of the
integration seems to be very close. Duality was a serious problem, and was largely
caused by FDI, since foreign firms did not integrate into the local economy. She
meant that the group of domestic industrialists should be promoted strongly. National
industry was present in all successful industrialization efforts, and they may limit the
dual structure of the economy as well.
Other participants also had minor, less important contributions, but they rather
supported or challenged other participants’ opinion.
The discussion was closed with summary remarks of Mr Miklos Szanyi at 12.15. P.M.
Thereafter guests were invited to have lunch and informal conversations with eachother in the Restaurant of the Hotel.
Budapest, 2002.09.20.
Szanyi Miklos