Foreign Direct Investment in Hungary

by: Mathias Urbaczek and Sven Waltert

Content

1. Preface 4

2. Overview of the Hungarian Economy 4

2.1 Historical Background of Hungary 4
2.2. Important business law in Hungary 8

Branches of foreign companies 11
Commercial representations 12

3. Theoretical considerations and evidence form the EU 18

3.1. Motivation for going international 18
3.2. Mode of FDI 20
3.3. Investment in the EU since 1992 21

4. FDI in Hungary 24

4.1. Reasons for investing in Hungary: 24
4.4. The Repartition of FDI between the different industry’s sectors and countries 30

5. Conclusion 33

SOURCES 34

1. Preface

For Hungary and the European Union, the 01. May 2004 is one of the most important dates of the history of Hungary, because they and 9 other countries joined the EU. Finally now the very long time of the separation between Eastern and Western Europe is over. It is now the first time in Europe that all countries of this big continent could life together in peace and can create an economical and political union.
For Hungary it was like for the other new members a very long and hard way to transform the economy to the rules of the market economic system, but they have some advantages because they have started the reform process already before the political change. So as a reason now Hungary has received 31 billion euros as foreign direct investment until 2003. This means they have about 3.100 Euro FDI per inhabitant, only the Czech Republic has received more FDI per inhabitant.
In the assay the authors want to concentrate to the historical background, the business law, the motivation for invest in Hungary and give some data about the FDI in Hungary.

2. Overview of the Hungarian Economy

2.1 Historical Background of Hungary

In contrast to the neighbour countries the economic reforms in Hungary have already started before the political movement in 1989. In the 60s the reform program of Janos Kadar started.
Hungary has established a consumption orientated communistic economical system which makes Hungary one of the most liberal economic countries in the eastern Europe region.
Hungary is a member of the international currency fond and a member of the World Bank.

With the political changes Hungary started the movement to Western Europe immediately. In 1994 Hungary was the first Central- and Eastern Europe country which applied for a member-ship in the European Union and finally in May 2004 it was accepted finally.

The consequent economic openness after the end of the communism caused first a lot of eco-nomic problems, which could be solved at the end of 1993. But the offensive budget-policy leads the Hungary economic in difficulties of balance sheet soon. These problems would fi-nally be solved by the former financial minister in 1995 when he introduced a new fiscal po-litical stabilisation program and also a change in the currency politics. The transparent system of the so calls “crawling peg”, which means the slowly devaluation against other currencies, was included. This stabilisation methods leads the Hungarian economic soon to a solid grow of the economic. Furthermore Hungary started a dynamic economic catch up process against the Western Europe countries. The gross domestic product (GDP) was in 2003 already at about 73.1 billions of Euros. With this GDP the purchasing power of the consumer increases per unit to about 13.400 Euros, this means an increase of 60% of the average of the EU-25. Among the new EU- members only Slovenia and the Czech Republic had over dropped Hun-gary.

During this development there was also a massive change in the structure of the Hungarian economic. The part of the agriculture has decreased of less then 4% after the political changes in 1989. In contrast to the other Eastern European economies, the Hungarian service sector has increased to about 65%. The reason was that in Hungary the relatively liberal economic system has already existed since the beginning of the change. The economic increase was to be linked with the success of the industry. Because of the support of foreign investors this sector grew at lot after the recession and has a share of about 30% nowadays.

Hungary has also a very interesting economic framework that the authors want to explain in the next section.
The active trade policy, which leads to different co-operations and trade agreements, brings Hungary to a very opened economic with a lot of international relationships. The export quote is about 65%
Since the first of May 2004 Hungary is a member of the European Union and takes part in the common European market. Because of the many economic links and political relationships the biggest Hungarian trade partners are the EU-15 countries (75% export; 55% import with those countries). As Hungary is centrally situated, it has been an important partner for the transit trade between the East and the West.

Illustration 1: Exports by countries [illustration only in dowloadfile]

Illustration 2: Imports by Countries [illustration only in dowloadfile]

Because of the good central situation Hungary has become one of the most important trade actors and a transit country in Eastern Europe. The infrastructure in the Western part of the country and around Budapest is already well developed. Lacks in the infrastructure still exist in the eastern part, but there are already some programs of the government to improve the situation.
Building of new routes has been a high priority and Hungary has already a well-developed domestic network. With a global length of 500 kilometres, seven of the eight highways start in Budapest and are connected with all important cities.
The railways system has a total length of nearly 7900 kilometres and is highly developed be-cause it is the lowest cost way of transport for goods and people.
Although Hungary is an interior, it has connections to the Black Sea (via Donau) and to the North Sea (via Rhein-Main-Donau).
In Hungary only one international airport in Budapest exist, but the government is thinking about to convert some old military airbases into public airports.
In contrast to other Eastern Europe countries, the Hungarian telecommunication system is very well developed and so about 40 % of the inhabitants have a phone in their flat. 50% of the inhabitants are using mobile phones and there are more and more people using the Inter-net.

An investor in Hungary can also fall back on a well-educated working force. The Hungarian workers know how to deal with the conditions of a market economy better than the workers from other Central and Eastern Europe countries and know also how to manage a company. Also the computer and foreign-language skills are very good.
With its monthly average wage of around 530 Euros, Hungary is in competition with the other reformed countries, but has lost a part of its leading position because of an increase of the wages in the last years.

Illustration 3: Cross monthly wages [illustration only in dowloadfile]

With a GDP per worker of almost 19,000 Euros per year, Hungary has a very good productiv-ity, which is better than the other comparative countries (only Slovenia has a better one).

Illustration 4: GDP per employee [illustration only in dowloadfile]

But it has to be pointed out that in some areas of Hungary, especially in the Western part and in Budapest there is a shortage of well-educated workers and so the salaries are higher than the Hungarian average.

The bad economic situation, which has badly influenced the circumstances in the last two years, is going to get better. The economic growth has become more dynamic. The inflation will grow because of a decrease of the taxes but it will be under the level of 7%. The govern-ment has started some reforms to control the deficit of the budget, but the reduction of the debts will slowly decrease and the introduction of the Euro won’t be predicted until 2010. The trust of the investors in the stability of the economic in Hungary is growing slowly, a result of this is the very strong currency.

2.2. Important business law in Hungary

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