The development of the investment market in Hungary

Andras Sugar
President, Hungarian Joint Venture Association

The transition process in the Central and Eastern European countries, including Hungary, has been under way for more than seven years. During this period very real achievements have been made, but the transition to a market-based economy is a very complex process. Foreign direct investment has a key role to play in the reconstruction of the Hungarian economy.

Three important elements determine the transformation of the economy: one is changing the owners of the companies, the second is foreign direct investment (a major component of capital inflows) and the third is changing the markets. These events are taking place in parallel and at an unusual speed. Foreign direct investment has increased dramatically. Hungary alone attracted half the foreign direct investment invested in Eastern European countries as a whole. Foreign direct investment amounted to more than US$14 billion at the end of 1995. Hungary is rebuilding a market economy by changing owners on the basis of strong political motivation and new political possibilities. How did this begin?

Hungary was the first to move towards reform, and as early as the 1970s more freedom was given to state enterprises. In 1972 it was already possible to establish associations with foreign participation, which to a certain extent could be considered a 'private sector'. However, owing to the political dependence of the country and the lack of confidence in the political and economic situation, only a few joint ventures were registered (30 between 1972 and 1984). Today, more than 27,000 are registered. The table below shows the 'evolution' of the past seven years (the accumulated number of investments each year).


Comparison of FDI and FDI per capita

Foreign Direct Investment (US$m) end-1995 FDI per capita (US$) end-1995
Hungary 12,700 1,233
Poland 6,800 177
Czech R 5,900 573
Slovenia 1,500 750
Slovakia 700 132

In the 1990s, several major manufacturing industry projects were promoted by the activity of foreign capital (eg, in the field of passenger car and component manufacturing - Ford Hungaria, Opel Hungary, Magyar Suzuki, Audi - chemicals and the pharmaceutical industry).

In 1995 - following the privatisation of the energy sector - Germany became the largest foreign investor, followed by Austria and France close behind. The leading role of the US in Hungarian investment was most conspicuous up until 1994, with major investments by companies such as General Electric, General Motors, Ford and Guardian Glass.

Of the world's 50 largest multinational corporations, 35 have invested in Hungary.

The government's policies in general encourage the creation of companies with foreign participation in Hungary (joint ventures and companies wholly owned by foreigners). For a foreign investor there are basically two laws that govern such ventures (in addition to the tax law and the foreign exchange law).

The company Act (Act VI of 1988) lists the various forms of businesses and also states that all laws that apply to joint ventures also apply to wholly foreign-owned enterprises. Such businesses may purchase real estate for the operation of their businesses.

Act XXIV of 1988 on Investment by Foreigners in Hungary specifies that investments of non-residents receive full protection and equal treatment. Two fundamental guarantees for foreign investors are provided: repatriation of profits and full and immediate indemnity for any loss resulting from nationalisation or expropriation. No permit is needed for a joint venture or wholly foreign-owned company and foreigners can operate in any field, including manufacturing, services, retail or wholesale and foreign trade. Governmental approval is required only in special cases (eg, banking or insurance activities) where it is also needed by purely Hungarian companies.

Foreign investment in Hungary may take the following forms:

  • 100 per cent purchase of a Hungarian firm;
  • purchase of a majority or minority interest in an existing Hungarian company;
  • establishment of a joint venture with a Hungarian partner;
  • establishment of a company wholly owned by foreign interests.
Hungarian law requires that all companies file for registration with the Court of Registration within 30 days of their foundation.

Why invest in Hungary?

  • the country is politically and economically stable;
  • Hungary has concluded agreements for the protection of investment and the avoidance of double taxation with most developed countries;
  • the country has a favourable geographic location;
  • a low-cost, efficient and knowledgeable workforce exists and labour productivity approaches that of the Western European countries;
  • imports have been mostly liberalised;
  • the Hungarian currency is convertible;
  • progress in privatisation is in many sectors, including energy, almost complete;
  • the country is well on the way to accession to the EU;
  • there are allowances for companies that create new jobs in less developed areas or increase exports;
  • the interests of joint ventures and of companies wholly owned by foreigners is protected by voluntary, non-profit organisations like the Joint Venture Association.

Established in 1986, the Joint Venture Association (JVA) provides its members with a forum for discussion and keeps a watchful eye on any conflict of legislation. The mission of the JVA is to gain the attention of legislators and officials and allow foreign companies to 'have a voice' in public policy making. The JVA has contacts with about 1,500 companies from 35 countries that have invested US$4 billion in Hungary. The JVA is helping to make the Hungarian investment climate for foreign investors attractive. The JVA also provides sound advice, competent information and delivers useful services (eg, free consulting services provided by experts, conferences and round table discussions on current issues) for members.

Every four to six weeks manager dinners are organised in one of the member hotels, where company leaders can meet and exchange views informally. Attached to dinners, quite often, company presentations take place and key people from the Hungarian economic community are invited. The JVA Newsflash issued every ten to 14 days is regularly sent to members in Hungarian, German and English. Several publications of member companies are provided for members at no cost or at a discount.

Top | Hungary