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The competitive advantage of Hungary
1. Hungary’s successful integration into the global economy
In the last fifteen years the Hungarian economy integrated successfully into the global economy: between 1996 and 2007 the share of the country in global export doubled. The high expansion of export coupled with a strong growth of the industry in the past decade: between 2000 and 2008 it reached 8% on average.The industry supported by foreign investors underwent strong expansion and accounts for almost 30% of the GDP.
Foreign direct investment in Hungary amounted to an average of USD 5 billion per annum in the past few years, represented by about 200 announced projects on average. Automotive industry, software development and life sciences received the highest amount of capital. In line with global FDI tendencies, in 2009 and 2010 FDI inflow is expected to fall to USD 3-4 billion in Hungary (Economist Intelligence Unit, 2008).
3. Financial crisis and forecast
Thanks to immediate fiscal and monetary measures the crisis on the Hungarian financial market was brought under control in 2008. For 2009 the government announced strict fiscal tightening measures, a full state guarantee on bank deposits and introduced a financial support program for SME-s, including:
●Easing the conditions for micro credit
●Expanded credit limit and extended duration
●Credit guarantees for SMEs
●Government guarantee up to 80% (maximum HUF 100 million credit)
●Re-financing to commercial banks to provide loans to SMEs
●HUF 50 billion total credit facility (HUF 10-100 million/enterprise)
●Risk capital program
●HUF 45 billion total facility
●Easing the conditions for getting development funds
●Easing growth requirements
●Export expansion promotion package
•selected, less effected markets
•selected, competitive sectors
•2000 SMEs with significant export
●Outward FDI promotion package
•combined ITD Hungary, Eximbank, Mehib support
•Supplier development promotion package
•grows indirect export
•combined support package
4. Competitiveness in location factors
Productivity and labor costs
• Hungary’s major competitiveness factor is the level of productivity that has been growing steadily for years. Productivity growth has been a major source of GDP growth in the country. In 2008 labour productivity measured as the GDP in Purchasing Power Standards per person employed (EU-27=100) was the second highest in Hungary.
• Although domestic real wages have been increasing, Hungary managed to maintain its wage-based competitive advantage. The total labor costs associated with the production of one unit of GDP was the second lowest in the region in 2007 (values calculated by the Ministry of Economy and National Development).
Enterprises operating in Hungary realize a stable rate of return on equity of over 10% (based on corporate tax returns and calculated as a proportion of profit and owners’ equity) since corporate profitability has improved significantly compared to 2003.According to IMD’s World Competitiveness Yearbook, Hungarian large corporations are the most efficient in Central-Eastern Europe by international standards.
• World Bank: Doing Business. In the framework of its Doing Business survey, the World Bank assessed almost 180 countries and regions concerning their business environment. Among these countries Hungary reached the 41st position in 2008, stepping 4 ranks higher than in 2007. The report recognizes Hungary’s reforms to reduce bureaucracy: the country is among the top ten countries that introduced the most significant measures to ease administrative requirements.
• The Heritage Foundation assesses the economic freedom in more than 150 countries. In 2008 Hungary ranked 43, it means that the country stepped 9 places forward. Trade freedom, monetary freedom, investment freedom and business freedom received particularly high scores.
• According to Transparency International’s Global Corruption Barometer Hungary has boasted the lowest corruption in the CEE region for years, as in 2007 as well.
In 2007 the country ranked 39 of the 130 surveyed countries.
• With its 16%, the corporate income tax level is one of the lowest in Europe. Effective tax rate (around 12%) is even lower due to significant tax breaks. Although the temporarily introduced solidarity tax (4%) and the local business tax (max. 2%) increase the burden of the corporate sector, the tax burden on profit is relatively low in international comparison.
• Labor regulations in Hungary are relatively liberal in international terms: the rules of hiring and firing are more flexible than in Western-Europe. According to IMD’s World Competitiveness Yearbook (2008) labor regulations do not hinder business relations in Hungary.
Due to Hungary’s favorable location in the centre of Europe the country is a natural logistics centre. Several international routes cross the country. In addition, the density of public roads is quite high in European comparison.
Source: ITD Hungarian Investment and Trade Development Agency