Hungary: The Logical Choice

FDI Inflow and Stock

Hungary, a country with a population of 10 million, has attracted Foreign Direct Investment (FDI) of more than EUR 60 billion to date, a figure that represents a high per capita rate relative to the rest of Central and Eastern Europe.

 

Table 1: FDI stock per capita in the CEE region, 2009

Data from 2008 (Table 2) shows the effect of the global economic crisis on FDI. FDI inflow of EUR 3.1 billion was considerably lower than the EUR 4.4 billion posted in 2007. Reinvestments slumped as a result of the global financial crisis, while other capital flows were negative following an increase in reverse intra-company loans and repayment of debt to parent firms by Hungarian subsidiaries of multinational organisations.

This trend continued in 2009 even though the inflow of equity capital increased compared to 2008, reinvestments and reverse intra-company loans decreased inflows significantly.

 

FDI Stock

The value of FDI stock decreased in Hungary in 2008. However, this is more the result of a new methodology for FDI data collection introduced by the Hungarian National Bank and the depreciation of the forint than an indication that capital was withdrawn from the country. In Q2 and Q3 2009, however, FDI stock increased again and reached EUR 60 billion.

Table 3.: FDI stock in EUR million

FDI stock in Hungary by sector
The manufacturing sector now accounts for more than one third of foreign investment in Hungary. By contrast, manufacturing was the main target of almost all investments in the early 1990s. Since then, however, services have gained ground, partly because privatisation in the services sector began later than in manufacturing. According to Ernst and Young’s CEE Attractiveness Survey of 2009, investments in services doubled in Hungary between 2004 and 2008 in terms of the number of projects. Today, the share enjoyed by services exceeds that of the manufacturing sector by 20 percentage points.

In 2008, Hungary was the target of 21% of all services investments in the CEE, although the automotive industry was the best performer last year as far as the number of jobs created is concerned.

FDI stock by country of origin

As in other CEE countries, investors from the EU-15 countries historically account for the overwhelming majority of investments in Hungary – 79% according to the Hungarian National Bank in 2009. This dominance is explained by geographical proximity and historical links.

Germany is by far the most important country of origin with 25% of all FDI, followed by the Netherlands (14%) and Austria (13%). The United States is the largest non-European investor (5%) and many investments made through the Netherlands and other European countries also originate from the US. Of the Asian countries, Japan and South Korea are playing an increasingly prominent role in FDI.

Although most investments arrived from the European Union in 2009, Germany performed very poorly with Q1 2009 producing the second lowest FDI figure from Germany since 2001.

Reinvested earnings play a dominant role in foreign direct investments, amounting to more than half of all investments in Hungary. Reinvestments in the services sector have increased significantly in recent years.

According to Ernst and Young’s CEE Attractiveness Survey of 2009, half of investors already present in Hungary are considering developing their activities in the country further.

In recent years, however, the share of reinvestments has decreased against total inflow.

 

The impact of the economic crisis on FDI

According to PricewaterhouseCoopers, FDI inflows to the CEE region decreased by 50% in 2009, while the real estate sector, which accounts for one quarter of all investments to the region, declined by 71%. FDI is  projected to recover slowly and will surpass pre-2009 levels only by 2014.

FDI inflow to Hungary was already on the decrease by 2008, falling by about 30% to EUR 3.1 billion (Hungarian National Bank, 2009). This downturn was worse than the CEE average (9% for new member states, UNCTAD, WIR, 2009), but better than the EU-27 average (40%, UNCTAD, WIR, 2009).

Hungary has recently been the focus of more small and medium investments due the increasing number of projects realised in the services sector. Between 2004 and 2008, investments in the services sector doubled (Ernst and Young, Hungary Attractiveness Survey, 2009). This shift in the distribution of capital inflows resulted in lower annual FDI in the short term.

The interest of foreign investors is still strong in the areas of shared services, ICT, logistics, tourism and biotechnology. Surprisingly, ITD Hungary has also received several inquiries from the automotive sector. However, the economic crisis has protracted the decision-making processes of companies as grew more cautious. Against this background, more than twenty promising decisions have been delayed from last year.

As far as announced investments are concerned, the number of projects declined by 48% regionally (see table below) in 2009, but Hungary performed better than its peers. This may result in a quicker rebound in FDI inflows over the next couple of years.

 

Table 4.: Investment announcements in the CEE region (number of projects)

COUNTRY	2008 PROJECTS          JOBS		2009 PROJECTS                     JOBS
Poland	362	30,654	130 (-65%)	7,705
Romania	356	13,753	111 (-70%)	5,337
Slovakia	85	3,220	34 (-60%)	3,619
Czech R.	142	5,412	65 (-55%)	5,289
Bulgaria	145	6,415	70 (-52%)	1,713
Hungary	146	9,963	118 (-20%)	11,015

Source: FDI markets, Financial Times, 2009, January

 

Over time, the ongoing financial crisis may alter the target sectors and source markets for FDI into Hungary. Europe and the US are likely to lose significance as major investors due to the effect of recession on their markets. Meanwhile, Asian countries, such as Japan and China, may emerge as increasingly influential sources of capital as they have been less effected by the economic downturn.

The financial crisis has hit the automotive and electronics industries in Hungary. Even before the crisis, the growth of investments had slowed in the automotive sector, signalling that the importance of the industry was also on the wane in the medium term. The impact of the major Mercedes investment in Kecskemét will undoubtedly counterbalance this decline to some extent – ITD Hungary expects the Mercedes project to create 10,000 to 12,000 thousand new jobs.

FDI in logistics and machinery has seen outstanding growth over the last two or three years. These will remain major target sectors, although the growth in their number is expected to fall in the medium term.

Hungary has been the subject of a large number of service centre investments over the past five years. Outsourcing may be a major driver of FDI during the crisis as an answer to cost-cutting pressures. The relocation of a variety of service providers and operations to Hungary will increase FDI in the sector in the short term.

The most significant investments in 2009 include:

BP: Shared service centre in Budapest

Bosal Group: Expanded its automotive components manufacturing plant in Kecskemét

EGIS: Pharmaceuticals R&D centre in Budapest

Harman-Becker: Automotive electronics, Székesfehérvár

PATEC: Automotive components, Szikszó

Technica Ungheria: Light industry, Nagykálló

Via One: Software development, Budapest