Capital flow to Hungary still unmatched in Eastern Europe

Since 1989, Hungary has been a leader in the Eastern European transition from a socialist command economy to a market economy, due to its initial economic reforms during the Communist era.

Since the country was never a loyal member of the “eastern bloc,” Hungary remained independent in mind and spirit. Its strong commitment to market reform and its openness

to foreign direct investment has since resulted in foreign capital flow into the country at a rate still unmatched by neighboring countries.

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Hungary’s progressive attitude and hard work have resulted in a “commercial safe haven” for foreign investment.

On the way to a full market economy, Hungary has avoided mass privatization in favor of piecemeal privatization. In turn, a search for strategic investors has generated real restructuring through management modifications, capital infusions and technology transfer. Resulting

growth rates have been less spectacular than elsewhere, but the upturn is real and sustainable and should lead to a long-term revitalization of companies and the economy as a whole.

This strong commitment to market reform and the emerging recovery had provided a favorable environment for U.S. firms. Hungary’s openness to foreign direct investment permits fully owned subsidiaries. Joint ventures are also attractive because, in principle, American business strengths combined with Hungarian assets and skills (not the least of which is a reputation of ingenuity) can create a powerful business combination.

There are also many opportunities for Colorado companies in various growing markets. An interesting export sector is computers and peripherals. The most dynamic growth sectors of the market are: systems and servers, workstations, active networking elements, and professional services. Workstations are at the top of the of the information technology hardware market, with an annual growth rate of 20 percent.

Electronics support and supply industries, along with other high-technology products and services, also are growing. For example, information technology procurements of $100 million for the banking and finance industry are expected within two years

In addition, by 1999, the number of personal computers will reach or exceed 180,000. Since Hungarian end-users are rather price-sensitive, the demand is higher for generic computers than for brand names.

There is also a rapidly developing small, office/home office (SOHO) market. For 1996, the value of imports in the computer industry was approximately $300 million

Another promising sector is the market for telecommunications equipment. The total amount of planned investment in telecommunications equipment by MATAV, the Hungarian Telecommunication Company, will reach an estimated $4 billion by the year 2001, which represents a great export opportunity for Colorado telecommunication companies.

While pollution control equipment is in high demand, the cost burden for many environmental projects falls on poor local municipalities. Creative venturing and/or concessions may support the import of U.S. environmental equipment into Hungary. One of the most important environmental programs is the clean-up of former Soviet military bases. The growth of government-sponsored projects has already attracted interest from foreign companies.

Oil and gas exploration is ongoing, led by American interests, and the market’s receptivity toward oil and gas field machinery products from the U.S. is good. Considering Colorado’s long history in the oil and gas industry, Hungary represents a prime market for Colorado’s enterprises with expertise in these fields.

A new net generating capacity of almost 4,000 megawatts is planned by the year

2010, requiring injection of about $5 billion in capital in the power generation sector. While most Hungarian power generating facilities are environmentally unsafe and inefficient, this program represents great export opportunities for U.S. companies to provide generating services

and equipment.

There is a great need for health care and hospital technology in Hungary. Equipment currently in use is outdated and requires continual maintenance. However, the lack of funds postpones many of the projects in this area. The pharmaceutical sector also represents further export opportunities for U.S. enterprises.

The market for agricultural products is well-established, and trade linkages are solid. U.S. seeds and bovine semen exports have been traditionally strong, and there is now an export opportunity for soybean meal and poultry breeding stock — as long as the American products are

price competitive. Food processing is another sector offering export opportunities to U.S. companies.

Franchising has also proven to be a successful form of doing business in Hungary. It is expected to bring further needed improvements in postal services, property management, home maintenance, parking facilities, passenger and cargo transportation, recreation and travel, rental and distribution services.

Although Hungary offers many opportunities for Colorado companies, there are some obstacles to consider. Hungary’s bureaucracy is typically inefficient and personalized, emphasizing the importance of personal ties and an understanding of the levers of political power. Newcomers need to have commitment, vision, and patience.

The bank system is also archaic, though the Hungarian government is in the process of

privatizing this industry.

One important advantage for the future is Hungary’s location, which is touted as perfectly situated, both physically and culturally, to be a gateway between East and West. This aspect is important because of the region’s long term growth prospects. Coupled with low labor and site

costs, attractive tax regimes, political stability, and the promised European Union membership by early next century, these factors make Hungary attractive not only for exporting but also for investing.

Michael Straub is an intern at the World Trade Center Denver