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
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