Philipp Fink, Linkages in:

Philipp Fink

Late Development in Hungary and Ireland, page 166 - 169

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
166 1995, GDP was 3.8% larger than GNP. In 2002, this discrepancy increased to 5.4% having peaked at 6.1% in 1998 - a year with exceptionally high profits (HCSO: 2006).137 Profit repatriations are only then worrisome if the non-debt-related capital income from abroad cannot neutralise capital outflows. This can lead to a negative capital balance, which together with a negative trade balance can detrimentally effect the country’s balance of payments position. Nevertheless, interpreting these developments as a sign for decapitalisation is questionable. TNC investments have undoubtedly contributed to physical wealth creation. Foreign-owned firms were responsible for 78% of Fixed Capital Formation in the manufacturing sector (Günther 2005: 48). Furthermore, the reinvestment of profits was still a considerable source for FDI in Hungary (Sass 2004: 66). However, the overvaluation of Hungarian GDP does pose problems in terms of the assessment of the real performance of the economy and the development of per head incomes measured in GDP per capita. These figures determine, for instance, the level of transfers from Brussels. Thus, the aggregate growth performance of the Hungarian economy may have been overrated, leading to a possible underestimation of EU transfers. 4.2.2 Linkages As shown, the economic impact of the high level of FDI inflows has been impressive. Those sectors targeted by investing TNCs have disproportionately contributed to the rise in aggregate exports, productivity and output. Foreign-owned firms have hugely contributed to the redefinition of the country’s trade competitiveness. TNC exports have enabled Hungarian exports to widen their market shares in the EU. It is, therefore, necessary to analyse the secondary effects of FDI on the productive structure. The FDI-led development strategy foresees the host economy in general and indigenous firms in particular benefiting from the increased engagement of foreign firms via the evolution of direct and indirect linkages. TNCs are seen to act as “catalysts for economic development” by inducing technological upgrading of local firms indirectly by demonstration and efficiency effects or directly through cooperation between indigenous and foreign-owned firms (Markusen/Venebles 1999: 336-337). 137 Calculations based on GDP and GNP (GNI) figures in respective current prices taken from HCSO (2006) data. 167 Direct and Indirect Linkages In terms of pecuniary linkages, i.e. the direct contribution of TNCs to state revenue, the share of taxes paid by foreign-owned firms rose throughout the 1990s. According to ÉltetQ (2001: 9) the share of corporate taxes from TNC affiliates rose from 36% in 1995 to almost 50% in 1999. Despite the extensive tax concessions offered by the Hungarian government for investments in certain sectors and underdeveloped regions, the difference between paid taxes and calculated tax levels (i.e. the level of effective tax concessions) has been decreasing. In 1997, 45% of the calculated tax levels were paid by TNCs. By 1999, this figure increased to 53%. Moreover, the total volume of revenues from TNCs grew by almost 63% (ÉltetQ 2001: ibid). In terms of productive linkages, the picture is less clear cut. Although the exportprocessing nature of TNCs in Hungary reduces the possibility for large-scale forward linkages between foreign and indigenous firms, subcontracting of export production has taken place. Szanyi (2002a: 10) estimates that in 1996 the export share of subcontracted production of total exports stood at 24%. By 1999, this figure declined to 20%, although the absolute volume of subcontracted exports remained the same. This decline in relative proportions was the result of the increased output of TNC exports, as a consequence of EPZ investments coming of age (Szanyi 2002a: 10-11). In general, the issue of developmental benefits from subcontracted export production is contentious (Szanyi 2002a: 8). As the negative example of the Mexican Maquiladoras shows (Rodríguez-Clare 1996: 866), it is feared that indigenous firms are only involved at the lowest possible technological stage of TNC production. Hence, the innovation potential of this form of co-operation in the form of learning effects for indigenous firms is regarded to be limited. However, Hungarian case studies show that subcontracted export production forms only one of several activities in many Hungarian firms. Furthermore, the insertion of indigenous firms into the global production networks of TNCs can induce a larger modernisation impetus for the subcontractor than in the case of no relationships. Szanyi (2002b: 11) shows that subcontracting has led to an increase in local value added and enabled the technological upgrading of indigenous activities. Turning to backward linkages, again due to data restrictions only tendencies in the level and volume of backward integration between TNCs and Hungarian suppliers can be relayed (Sass/Szanyi 2004: 370). The Hungarian government estimated that TNCs source between 10% and 20% of their supplies domestically (Günther 2002a: 132). According to HCSO (2004a) data, the proportion of machinery sourced domestically by investing TNCs has risen from 13% in 1995 to 22% in 2002. However, the figures do not distinguish between indigenous and TNC affiliates as suppliers. More detailed analysis of suppliers to foreign-owned firms in the region of Central Hungary, where 60% of the country’s FDI stock is located, found that manufacturing TNCs sourced 56% of their primary products and 57% of its intermediaries from abroad. 33% of domestically sourced primary and intermediary products were 168 bought from other TNC affiliates located in Hungary. Only 13% of supplies came from indigenous firms (Günther 2002a: 132-133).138 Sass and Szanyi (2004: 371) cite questionnaire surveys on TNC sourcing behaviour in the important manufacturing branches of transport equipment and electrical components. The surveys approximate that around 2/3 of domestically sourced supplies originate from other TNC affiliates located in Hungary. However, the surveys also found that although Hungarian suppliers delivered a wide range of products, their share in TNC turnover only totalled 2% to 10%, as the majority of products were mainly of low value added content (Sass/Szanyi 2004: ibid). The low level and quality of cooperation between foreign and indigenous firms has implications for the degree of possible spillovers from the foreign into the indigenous sector. A commonly used indicator to assess the existence of technological spillovers is the technological content of output. Indeed as shown, the technological content of Hungarian exports increased markedly throughout the 1990s. However, this was the result of increased high-tech TNC export production (ÉltetQ 2000b: 54). Econometric evidence for the existence of positive spillovers from the foreignowned sectors to indigenous firms is ambivalent at best (Szanyi 2004: 203; Günther 2002b: 12). Positive demonstration and competition spillover effects are weak in the Hungarian economy (Bosco 2001: 64). Görg at al. (2006: 14) and Görg et al. (2005: 10-11) find no conclusive evidence for the existence of productivity spillovers. Although case studies show individual exceptions (Habuda/Szalavetz 2000: 51-53), whereby TNCs have actively pursued a technological upgrading of their Hungarian suppliers, “secondary analysis of survey material does not point to the fact that [TNCs] serve as a source of technology spillovers” (Günther 2002b: ibid). The low level of technological spillovers can be related to the low strategic position of the respective affiliate within the international production network of its parent TNC. Although the majority of Business Expenditure on Research and Development (BERD) is undertaken by TNCs (Beer 2003: 61), actual product innovation is low (Günther 2002a: 95-96). Máko/Illéssy (2006: 8) estimate that 84% of indigenous firms and 78% of TNCs could be categorised as non-innovators in 2001. In terms of the quality of R&D undertaken by foreign-owned firms in the Hungarian economy, very little basic research is done (Szanyi 2002b: 13). The majority of R&D was related to the production process and product improvement, which implies that existing products and production techniques and therefore existing knowledge was enhanced and not primarily created (Günther 2002a: 91). Beer (2003: ibid.) concludes, “technology and knowledge transfer hardly exist”. 138 An analysis of the car production sector (BAFA 2006) lists the five largest local producers of supplies. Based on information from websites of the mentioned firms, only one of these firms was Hungarian-owned. Similarly, of the three largest suppliers to the Audi manufacturing plant, which produces the sports car Audi TT with a reported local content of 30% and engines for the European Volkswagen plants with a reported local content of 75%, only one was a Hungarian-owned firm. 169 Sass/Szanyi (2004: 376-377) also argue that the level of local content and valueadded in production depends on individual sectors, market entry mode and locational motivation of the respective TNC. Regional and national market-seeking brownfield FDI tended to continue the supplier relationships of their acquired Hungarian firms. The example of the food industry, which exhibits a high level of foreign penetration, shows that local supplies were sourced, if they complimented the production and profit strategy of the investing firm. Hence, privatisation FDI and investments based explicitly on local supplies unsurprisingly showed more local content in its production than greenfield and especially EPZ investments (Sass/Szanyi 2004: 376). In contrast, co-operation with local firms is especially low in those exportoriented sectors, which are defined by the assembly of imported intermediaries, such as computer hardware, black and white goods, and transport equipment production (Sass/Szanyi 2004: 377). These industries also show higher incidences of intra-firm trade. Although the end product may be deemed of high or medium technology content, its production relies on low skilled technical work, as the case of the computer hardware industry shows (Sass/Szanyi 2004: 373). This anecdotal evidence is backed by econometric data on the propensity of foreign-owned firms to source local inputs. Görg et al. (2006: 14) conclude that efficiency-seeking export-oriented TNCs undertaking labour-intensive operations are less likely to produce spillovers via linkages with indigenous firms. Instead, TNCs preferred to continue the cooperation with their established suppliers. As a result, TNC production networks were created leading to agglomeration effects, but with minimal indigenous participation. The clusters, therefore, resembled barriers-to-entry for indigenous firms, as the location of traditional suppliers effectively barred Hungarian firms from supplying exporting TNCs (Sass/Szanyi 2004: 376). Co-locations of suppliers also secured additional production advantages for foreign-owned firms, as production techniques did not have to be adapted to local companies, thus saving time, ensuring the quality level and securing production knowledge (Antalóczy/Sass 2001: 50). 4.2.3 Indigenous Firms The use of superior production technology, the location in sectors defined by increasing internal and external returns to scale have resulted in TNCs to vastly outperform Hungarian enterprises. The consequential low level of embeddedness of foreign affiliates in the Hungarian economy is also the result of the unattractiveness of indigenous firms as suppliers to TNCs (Sass/Szanyi 2004: 377-378). Consequently, two sectors have evolved defined by different nationalities of ownership with a minimum of interdependence. They display distinct performance gaps, whereby the foreign-dominated sectors of the economy are outliers relative to indigenous firms of the economy in terms of productivity, capital-intensiveness of production and export-orientation.

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