Today, Hungary is playing that role, acting as a link to Eastern European countries not yet part of the EU. With it’s easy access to the Balkans, Southern Europe and Ukraine, Hungary is seen as a geographically ideal location by investors who want to reach those countries while taking advantage of the stable political and business environment in Hungary. Hungary’s easy access to Eastern Europe makes it a centrally located country from which to do business with both Eastern and Western Europe, and companies are increasingly eyeing the country as a location for regional headquarters or other big chunks of business, such as research and development departments, call centers, service centers, logistical centers and even headquarters. “Companies are now interested in second generation possibilities in Hungary,” said István Major, deputy state secretary of the Ministry of Foreign Affairs in charge of external economic relations. “There are signs that research and development centers, call centers, and big service centers are going to be increasingly established in Hungary. And there are many examples that show Hungary is extremely good in the field of logistical centers, since it is a good location for companies who would like to be closer to their customers, or would like to use Hungary’s location as a way to deliver their goods more efficiently.”

Hungary as a bridge

McData, a Colorado-based leading provider of storage networking solutions, recently expanded into Hungary to take advantage of its new EU membership and central location. The company, which has offices throughout Western Europe, opened its first Eastern European office this month in Budapest and plans on this new office being a bridge for expansion as well as an outlet to create partnerships further south and east. McData executives looked at several other countries in the region before choosing Hungary, drawn by its stability and qualified labor. Since McData already had partners in Hungary, a large existing customer base here and eastward expansion plans, Hungary was the ideal choice, said Stefan Born, the company’s regional sales manager for Central Europe, based in Frankfurt. “Budapest will be our bridge to the neighboring countries,” he said. “Vienna was our first bridge to the region, but now we need to get closer.” McData will be starting its Hungarian operation on a small scale. For the time being, Balázs Horváth, the new senior sales manager for the region, will be solely in charge of Hungary and 14 other Eastern European countries.

“I have to make a very thorough analysis of the region and where we will go from here,” said Horváth. He mentioned using the Ukraine as a gateway to the Russian market and the fact that not enough attention has been paid to the Bulgarian market. Serbia, he added, will probably not be a very big consideration. McData’s growth in the region is expected to be between 25 and 30 percent in the first year, said Horváth, and the Budapest office has plans to expand in the future. “For companies thinking conservatively, Hungary is definitely a good choice.”

The early start

McData is the latest company to join the long list of multinationals investing in Hungary. The names on that list are impressive, and the sums that they’ve brought into the country have been massive. Of the world’s 50 largest multinationals, 40 are present in Hungary, according to the U.S. Commercial Service. Between 1989 and 2002, foreign investors injected nearly EUR 26.5 billion into Hungary, accounting for nearly one-third of all foreign direct investment in the countries of Central and Eastern Europe during this period.

Although Hungary was a leader in attracting much of the region’s early investment, things began to stagnate a few years ago. Analysts blame the government for much of this, and agree that in order for Hungary to be considered the best choice for companies establishing regional bases, some reforms must be made to keep Hungary competitive with the Czech Republic and Poland. “In the mid-1990s Hungary was much more attractive. We had a certain advantage and then we lost our momentum,” said Horváth, who cannot pinpoint exactly why this setback in 2002 and 2003 happened. “We were pretty advanced quite early, and then there was a series of small mistakes,” he said. “In the Czech Republic they tried to simplify things, in Slovakia they have a flat tax rate, but here we have a complicated tax system.”

An old Idea

The idea of Hungary becoming a regional business hub isn’t a new one, but it’s one that has never really taken off, said István Szabadföldi, CEO of the consulting company Bancraft Kft., who has been actively trying to promote Budapest as a location for a regional financial and business center. “This idea began in the early 1990’s when the first government after the system change tried to define Budapest’s position in terms of the transition,” he said. A working group then issued a study stating that Budapest had the potential to become a regional business hub. Szabadföldi worked on an American Chamber of Commerce committee to promote this idea, founding a group called the Budapest Regional Business Center Association. He also prepared an exhaustive study comprised of interviews with corporate leaders analyzing the attractiveness of Budapest as a regional base. The potential was there, Szabadföldi explained, but then the government support stopped. “The new government that came into power in 2002 didn’t really believe in this idea, and they didn’t really understand the opportunity. EU accession has definitely strengthened Hungary’s economy, but a question mark still remains,” he said. “The government corruption level is getting worse, and particularly in the area of infrastructure development there is massive corruption.” The government must also make a strong effort to strengthen the local small and medium enterprises (SME’s), said Szabadföldi, because “if we don’t have a good service infrastructure, it will hurt our chances of developing into a regional hub.”

Success Stories

Ask anyone in the business world what the greatest multinational success story in Hungary has been, and they will most likely say General Electric, one of the most significant investors and largest employers. “GE realized the opportunity here early,” said Szabadföldi. The company was one of the first multinationals to arrive in Hungary when the market opened to foreign investors, and it has been expanding ever since, significantly with the transfer of its European, Middle-Eastern and African base to Budapest in 2001. GE also recently announced plans to expand its 15,000 square meter logistics center in Nagykanizsa. Diageo is another company increasingly mentioned as being among Hungary’s most successful multinationals. The premium beverage company recently moved 60 administrative jobs from Scotland to its Budapestbased Business Services Center, increasing the workforce there to 130. It has plans to increase that number to 400 by 2005, the company said. Budapest was chosen from a shortlist of 19 other locations for the service center, which opened in 2001 and provides financial services for 13 of Diageo's European business units.

In Ernst & Young’s 2004 Attractiveness of Europe Survey, Central and Eastern Europe ranked second, after Western Europe, as the most attractive zone worldwide to do business in. Hungary also made it to the shortlist of the top 10 preferred countries worldwide, although it falls several percentage points behind Poland and the Czech Republic.

Government help

Hungary has not lost its momentum, argues Major, although the government has admittedly made mistakes.

“One problem that we realize has happened in the previous two years is that there was an increase in the wage levels,” he said. “But now the government has taken considerable efforts to stop this process, and as this is becoming known to foreign investors, we will regain our previous glory.” The government also needs to make reforms in the education system, Major acknowledged, which should become more oriented towards the real market. “We had an elitist education system, and therefore universities established their programs without taking into consideration the real demands of the market,” he said. “We are facing a possible future shortage of engineers. And we should fully consider in which other professions there are shortages.” There are 30,000 companies in Hungary with sizeable foreign interests, according to Major, and this foreign investment plays a huge role in the Hungarian economy. Sixty five percent of Hungarian exports are produced by companies with some sort of foreign investment and 60 percent of Hungarian GDP is from exports.

Location isn’t everything

Since joining the EU, Hungary has suddenly become a geographically desirable location for businesses aiming eastward. But Hungary cannot simply rely on its attractive location. Although it has only been a few months since EU accession, analysts say that Hungary needs to work on keeping itself competitive.

“The first round of foreign investment began after the government changing, when some multinational companies immediately entered the market,” said Enikő Tomor, trade development advisor in the Commercial Section of the British Embassy. “And after European Union accession, the second round of investment has come as more and more foreign companies are approaching Hungary.”

Other recent international investor activity in Hungary
Some of the announcements made in recent months include:
• Michelin will invest EUR 50 million into expanding its Nyíregyháza plant.
• Japanese automotive parts manager, Ibiden, plans to build a EUR 100 million factory near Budapest, which will employ 700 people.
• Austrian brick maker Wienerberger will finish work on its new EUR 20 million factory in eastern Hungary early next year.
• ExxonMobil will establish a EUR 44 million service center here, which will employ 400 people.
• Swedish telecom company, Ericsson, which runs a regional service center in Budapest, is to expand its Budapest-based Advanced Service Center into a research hub.
• Brooks Instrument, an arm of Emerson Process Management, will move its headquarters to Hungary from the Netherlands, which will create 40 new jobs, bring a USD 3 million investment, and make the company’s Székesfehérvár plant its European Super Service Center.