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 each-other in the Restaurant of the Hotel.
Budapest, 2002.09.20. Szanyi Miklos