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Does Hungary need foreign investment?

Foreign investment finances the Hungarian economy.

“It is difficult to find any economic reason why it would be in our national interests to send away foreign investors.”

Translation of Balázs Romhányi’s op-ed piece entitled“Kellenek-e a külföldi cegek?” appearing in the 5 October 2013 edition of HVG.

Wouldn’t it be possible to drive foreign companies out of the Hungarian economy, or at least some of them?  This question has been raised in recent political discourse.  The numbers prove that the answer is no and that it wouldn’t even be a good idea.  The typical foreign company is more efficient, pays more to its workers, exports more, pays more taxes and represents a higher level of technology than the typical Hungarian company.  The ratio of net profits to capital invested is not only not ideal but even lower that of Hungarian majority-owned companies because the former invest far more of their own capital, that is, the money they have brought to Hungary.  Among the reasons for the difference in efficiency between Hungarian and foreign companies is without question the much better equipment that increases the output of labor which, in turn, justifies higher wages.

Which company ownership is better for a typical Hungarian depends on how much money remains in Hungary per employee in the case of Hungarian and foreign owned companies.  One assumes foreign employees and managers will spend a larger part of their wages abroad than their Hungarian colleagues, but there isn’t any evidence of this.  The added value of managers’ wages is 3-5 per cent.  More important is the amount paid to suppliers.  If it is advantageous for a foreign owned company to patronize suppliers from his home country, then it is true that this is a relative loss in comparison to Hungarian owned companies.  The other side to this is that foreign companies operating in Hungary are elsewhere able to patronize their Hungarian affiliates in a manner that gives them a leg up over their competitors at home. For example, it is unlikely engines made in Hungary would be installed in Lamborghini sports cars were it not for the fact that it’s owner, Audi, owns the (Audi) in Győr.

Regarding the use of profit, it is an empirically well supported—although scientifically not entirely explainable—fact that home bias exists in capital markets, which means that investors tend to spend a larger percentage of their wealth in their own country than is theoretically optimal.  There is no accurate data showing how much value-added remains in Hungary in the case of a typical foreign majority owned company.   My simplified estimate (which is favorable to Hungarians) is the following: despite the fact that foreign companies pay significant dividends abroad, altogether they leave much more value-added here in Hungary.  The difference is even greater in the case of the largest companies.  In fact, this is even the case without taking into account the “Lamborghini effect”.

At the same time it is no doubt true that part of the value added leaves the country in the case of foreign owned companies.  For this reason the issue of buying out foreign owners has come up.  According to financial records filed at the end of 2011 of the HUF 40 trillion Ft in total company capital, HUF 23 trillion Ft was owned by foreign owned companies.  Real joint-ventures are very rare in that both foreigners and Hungarians are rarely willing to invest as minority owners.  For this reason in order for Hungarian ownership to dominate it is not enough to purchase half the HUF 23 trillion in assets owned by foreign companies as the means to do so is missing.

The numbers show that, with the exception of a few large ones, among Hungarian owned companies there are none with significant cash on hand, and the ones that do would prefer to invest it expanding abroad.  That leaves household savings.  According to Hungarian National Bank (MNB) statistics, however, as of the middle of 2013 this barely exceed HUF 10 trillion.  Further complicating the buy-out is the fact that households are strongly risk averse:  total stocks and bonds come to just HUF 4 trillion.  It is easily seen therefore that there is neither money nor intention on the part of households to buy out the foreigners.

However, this isn’t a bad thing because the MNB statistics show that the total net capital investment in Hungary (adjusted for the repatriation of profits) on the part of those not residing here was an average of HUF 550 billion annually, and that even in the worst years it reached HUF 340 billion.  This money finances the Hungarian economy which means that, even if we disregard the loss of higher wages, driving foreign companies out of the country would be a net loss for the country from the point of view of economic development.  It is extremely difficult therefore to find any sensible economic reason for which it would be in our national interests to send the foreigners away.

Editor: It is a regrettable sign of the times that Mr. Romhányi felt compelled to write such an opinion.

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