Hungary: a magnet for FDI

As a result of EU accession on May 1, 2004, investors in Hungary find themselves in a single market of 493 million consumers with enormous potential for developing new markets and new horizons. At the geographical centre of the region Hungary is destined to become a bridge between present EU members and those countries on the verge of joining. Hungary’s increasing importance in offering logistics services to regions such as the Ukraine, Russia and the Balkan Peninsula is also a key factor for consideration. For any company entering the European market Hungary’s central location is impossible to overlook.

If he could send a telegram to potential investors as to why they should invest in Hungary, Gyorgy Retfalvi CEO of Hungary’s investment agency ITD Hungary would cable them the following message: “Hungary is the bridge for you to establish manufacturing and distribution in Europe.”

The importance of foreign direct investment in Hungary has grown at a spectacular rate during the past 15 years. Multi-nationals now account for around 50 percent of Hungarian GDP and some 80 percent of exports. In the nineties, the country enjoyed a competitive edge thanks to its inexpensive labour costs, relatively deregulated markets and aggressive incentives, but today, many of these quantitative advantages are being slowly eroded away. This makes it all the more important to focus on areas where Hungary’s strengths lie, and to build a coherent economy that brings the best out of the country’s human resources.

“Until 1999, Hungary led the way in the region, labour was inexpensive and the government was able to offer extremely attractive investment incentives,” Retfalvi says. Today’s market for foreign investment is much more complex. “A country’s competitiveness is based on dozens of factors, such as labour costs, taxation, education, infrastructure economic outlook and location. Decision-makers face an extremely difficult task choosing which region is best for them,” he explains. “At ITD Hungary-Hungarian Investment and Trade Development Agency, it is our job to provide them with all the information they need to make the right decision. We promote Hungary by identifying and communicating its strengths, liaising with potential investors and advising the government on legal and taxation policies.” This demands a profound understanding of the wider economic picture, as well as a willingness to get involved in all the groundwork associated with major deals. ITD Hungary works across cultures and it must understand what motivates companies on a business as well as a personal level.” says Retfalvi.

Striving forwards
In an increasingly interdependent world economy, it is not only the Hungarian and Central European market that is changing fast. In response to competition from inexpensive manufacturing in Asia, North America and much of Europe have already made the transition to a largely service-based economy, and Hungary must strive to do the same. This means challenging employees, implementing technology and adopting business practices that will stand the test of time.  Hungary still has the lowest unit labour costs in Central and Eastern Europe in the manufacturing sector, with a labour productivity growth of 13.1 percent in 2006. Hungary has the highest annual growth in the region, which he said was partially due to its “appealing” tax regime.

According to Locomonitor, Hungary is ranked 13th in the world in terms of FDI, receiving almost two percent of international investment projects. Much of that, of course, is a consequence of Hungary’s reputation for having a well trained, creative work force, with a high ranking in R&D activity, particularly in the fields of computer science, engineering, and software.

“ITD Hungary markets well, and makes a keen effort in highlighting the assets of Hungary and its workforce,” commented Retfalvi. More than 80 companies have decided to launch a large investment project in Hungary, thereby creating 32,000 jobs. We have many decisions-in-waiting from French, American, British, Chinese, Japanese, and Israeli companies, hopefully with a good success rate,” adds Retfalvi.

On a regional level, as living standards and labour costs rise in comparison to Hungary’s immediate neighbours to the east, the type of investor it can attract has changed. With this in mind, IDT Hungary must continue to be responsive to new developments and fine-tune its strategy at every turn. For instance, while high-profile carmakers, such as Audi and Suzuki, initially entered Hungary to reduce the cost of assembling their vehicles, they have been persuaded to stay by the arrival of a second wave of suppliers, who manufacture precision parts and need to be involved in the development process. Naturally, companies like Japan’s Denso, who make fuel injection pumps for diesel engines in Székesfehérvár, have more sophisticated human resource needs. These jobs encourage individuals to develop their skills and generate more added value, earning them a higher cut of the revenues.

Location, location
The quality of life that Hungary offers to foreign investors and employees in Budapest and throughout the country is an important factor when businesses consider locating here. Expats working in Hungary for extended periods have not been disappointed: they have found living in Hungary pleasant and Budapest exciting and less expensive than other major European capitals. Moreover, the country boasts a rich and internationally recognised culture, distinctive cuisine, superb wines, a spa tradition stretching back centuries, excellent international schools (British, American, Chinese and Japanese for example) and countless leisure activities and facilities.

“If we can build a reputation as a nation of innovative, skilled and productive people, we can also encourage companies to conduct research and development here,” Retfalvi says, pinpointing Hungary’s highly educated workforce, particularly in the fields of mathematics, electronics, engineering and IT, as its key asset for the future.” Initially, companies were unsure whether we had the skilled people to take on key development projects. We now have a host of reference companies, such as Bosch, Flextronics and Samsung, to testify that we have all the necessary expertise,” he says. “Morgan Stanley recently set up a strong team in Hungary to work on their financial models, citing the extremely high standard of mathematics, for example.”

ITD Hungary regularly takes prospective investors on tours to these companies, introducing them first hand to top companies employing top people in high-profile projects. Once they are established, these companies will also invest in educating the next generation of employees through collaboration with schools and universities. “Having good references is crucial, it is all about knock on effects,” says Rétfalvi.

Setting roots
In addition to acting as a business ambassador for Hungary, Retfalvi is also responsible for ensuring everything runs smoothly once a company does decide to set down roots. “When companies first come here, they don’t have any contacts whatsoever. We put them in touch with the right people, sit in on negotiations and advise them on planning permission, taxation, finding suppliers and hiring employees,” he explains. This demands a diverse set of skills, as well as profound knowledge of the local business environment – the organisation must be greater than the sum of its parts. The agency managed more than €8.7bn of Foreign Direct Investment (FDI) in Hungary between 1998 and 2007. Total FDI stock in Hungary currently equals €66.8bn. ITDH employs works together with commissioners with profound knowledge of the world’s business markets and boasts a comprehensive network of offices world-wide.

Positive evidence of our efforts and success that ITD Hungary has received „World Class” evaluation in the IPA benchmarking 2004 of GDP Global by achieving a score of 70-75 percent in the general evaluation(project handling and investor servicing). On top of that, in handling enquiries concerning call centres, ITD Hungary was named best agency not only in Europe but globally as well.

We are very proud of the result we have achieved. This provides confidential feedback to us on our competitive strengths and competitive position amongst other agencies. This way we can work on the identified action points to improve our promotional strategies. Above all it strengthens our belief in the success ad usefulness of our work and gives impetus to our further efforts and development

For further information:
Tel: +36-1-472-8100


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