No. 63, 2001 - Dual economy, the role of the MNC-s in Hungary and the EU-accession

The paper – by summarising our research results proceeded in 2000-2001 – gives some answers to the question whether the fast increasing presence of multinational companies (MNC-s) did and would increase the gap between development prospects of indigenous and foreign owned firms in Hungary, or not? Whether the negative effects of a dual type of economic development could be revised (at least moderated) by the economic policy or not?
The analytical methods were to measure performance differences (and similarities) among company groups selected by the main ownership pattern. By using mathematical-statistical methods, the cross-section and factor analyses of the main economic indicators try to answer whether the MNC-s have typical or rather specific firm-attributes, or not?
Research results proved that in Hungary ten years were enough to the foreign investors to reach almost the same dominant shares in most industrial sectors as in the Irish economy during a much longer time. But the first signals of a dual type of economic development (a clear advantages of the foreign owned firms compared to the indigenous ones) also emerged sooner (already in 1996) than in the other countries (such as in Ireland, Portugal, or Spain).
The international comparison of earlier experiences of some peripheral countries (such as Ireland, Portugal, and Spain) revealed that the sudden huge FDI-inflows in a country would increase differences among the indigenous and foreign firms’ prospects. This pattern was general especially if the country offered large tax- and other incentives to attract foreign investment. Foreign investment by nature went on the activities where profitability was higher, and the better conditions of the foreign owned firms were multiplied not just by granted tax exemption and investment support, but by the fact, that foreign owned firms could employ skill-labour much easier even if there were shortages of them at the labour market.
The Irish example, however, also proved that if the problem of the dual type of economic development could be detected in time, economic policy could lessen its negative effects by supporting education and home capital accumulation by offering positive discrimination to the indigenous firms (SME sector). An opposite example of Greece – where the EU-accession was accompanied with an economic policy which did not helped FDI-inflows for decades – provided arguments, that the problem of dual economy could emerge even without FDI, but parallel with the decline of the overall economy.
Hungary followed the pattern of the those countries where economic liberalisation let a sudden and huge inflows of the FDI. But as the whole process went on faster than in those countries, a turning point of the trend seems to appear earlier, too. Since the first signals of dual economy emerged, indigenous firms also had produced a rapid improvement in performance, in export-ability and productivity, but the gap in some important economic indicators between indigenous and foreign owned companies had not diminished by 1999, even increased in some respects.
The detailed mathematical-statistical analyses proved, that the clear advantages of foreign firms over indigenous ones exist at the group-aggregate level, but this is partially due to the increasing and newly emerging investment of the MNC-s, rather then their significantly different behaviour or factors. Inside each company group the variances were at least as large as among the different groups. Profitability linked more to export-orientation than to FDI. Since 1996, credits for investment have gained significant role, and the type of activity had become a determinant factor by 1999. FDI in food industry for example produced much less rate of return than in engineering, while earlier, location by sectors had no significant effects (opposite to the experiences before 1996, when the effects of sectors hardly could be observed).
For policy conclusion, it is important, that those firms (even belonging to large global multinationals) which produced the most dynamic development, were not the same in 1999, than in 1996 or 1992. For future development the success of preparation for the EU-accession (the balance of gains and losses) will depend much more on the ability of indigenous firms to close the gap and to overcome their disadvantages compared to the foreign owned firms. Both the central government and local policy-makers must focus on harmonising their wishes for attracting further FDI by offering generous preferences and the aims of fostering the development of local indigenous enterprises and capital accumulation (even by positive discrimination given to local SME sector).

The paper is available here.