FDI-based development model in Hungary: new challenges?

Miklós Szanyi

Budapest University of Economics, and

Hungarian Academy of Sciences

Starting statements

• 1. Capital-based world economic integration is a main tendency of development

• 2. FDI may bring benefits as well as risks. Crucial is the balance of the two

• 3. FDI attraction and other related policies may have significant effect on locational decisions and on tapping benefits.

Capital attraction in Hungary 1990-1998

• 1. Political and economic stability

• 2. Privatization

• 3. Fiscal and regulatory incentives

• 4. Geographic location – market access

• 5. Cheap (qualified) labor

Benefits of FDI 1990-1998

• 1. Restructuring (sectoral and corporate)

• 2. Cash revenue (internal and external deficits reduced, BoP)

• 3. World economic integration (export driven economy)

• 4. Technology and knowledge transfers

• 5. Spillover effects (?)

Risks of FDI 1990-1998

• 1. Footless industries (linkages)

• 2. Crowding out (markets)

• 3. Concentration (sales of monopolies + mergers)

• 4. Profit transfers

What changed?

• 1. Absorption capacity at current investment patterns and conditions exhausted

- geographical concentration

- increased labor costs

- saturation (who wanted to invest already invested

2. Privatization is over

3. Incentive system was not EU-conform (tax holidays, free trade zone regulation)

Capital inflow

0

500

1000

1500

2000

2500

3000

1996 1997 1998 1999 2000 2001 2002

mn

EURO

ofdi inc.

portf.inc.

fdi inflowbl

Capital outflow

-1400

-1200

-1000

-800

-600

-400

-200

0

200

1996 1997 1998 1999 2000 2001 2002

mn

EURO

t.services

fdi income

portf.inc.

outw.fdi

Need for policy review

• 1. New targets- R and D- Regional development- Infrastructure- New, skill intensive activities

• 2. New incentive structure• 3. National development plan to reduce

bottlenecks

Conclusion: need for flexible FDI policy

• 1. Respond to changes in conditions

• 2. Support tapping new sources of benefits

• 3. °Invents° new tools of capital attraction