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. 170 The following table displays various performance indicators for foreign-owned and indigenous firms in the manufacturing sector of the Hungarian economy. Based on unconditional measures, large discrepancies exist in terms of productivity measured in value added and in sales as well as market orientation. The high proportion of imports of manufacturing TNC affiliates indicates the low share of local content in their output. They prefer to source their intermediaries and production inputs from either their traditional suppliers or through their international production networks. Table 4 Manufacturing Sector Performance in Hungary, 2002 (HUF mn) Foreign-owned a Indigenous Share of Firms 9.6% 90.4% Share of Employment 43.6% 56.4% Employee/Firm 91 12 GVA/Employee 5.8 2.34 Sales/Employee 29.3 9.01 Capital/Employee 11.6 2.58 Investment/Employee 1.47 0.48 Share of Total Export Sales 83% 17% Share of Total Imports 79% 21% a based on Hungarian official FDI records, which includes all firms with at least a 10% share of FDI in their equity. Source: Own calculations based on data from HCSO (2004a). Both productivity indicators show that TNCs are roughly three times as productive in terms of value-added and sales compared to Hungarian-owned firms. Although far fewer in numbers, manufacturing TNCs are more than seven times larger in terms of employment per firm than indigenous firms. Foreign firms are more endowed with capital, invested more per employee in 2002 and exported as well as imported more than Hungarian manufacturers. The figures indicate that foreign firms are able to reap economies of scale due to their larger size and capital-intensity of production, raising TNC labour productivity. As a result, TNCs were four to five times more profitable than indigenous firms in 1999 (ÉltetQ 2001: 8). Moreover, although TNCs represent less than 10% of manufacturing firms and employ less than half of the workforce in 2002, they dominated exports, imports and sales (HCSO 2004a). 171 4.2.4 Characteristics of Indigenous Firms Sass/Szanyi (2004: 378) see the main reason for the low linkage capability of Hungarian firms in the fragmented structure of indigenous enterprise. The Hungarianowned enterprise sector is characterised by a large share of underfinanced and small firms. They are engaged in labour-intensive forms of low technology production, display low productivity and are mainly oriented towards the internal market. As a result, they are technologically and financially incapable to supply TNCs with the necessary quality and quantity of desired products. The average size of 12 employees per Hungarian manufacturing firm (HCSO 2004a) indicates the small-sized nature of Hungarian enterprise in general. Following EU definitions in employment size (Major 2003: 120), 71% of firms in Hungary were defined as small and medium-sized enterprises (SME) in 2002 (MET 2002: 86). 76% of which are indigenous firms (Major 2003: 121). A more detailed analysis of the Hungarian enterprise structure reveals a very large degree of fragmentation. As shown in the following table, firms in Hungary are predominantly micro-enterprises, who accounted for the largest proportion of employment (26%) in 2000 (MET 2002: 88). Table 5 EU-15 and Hungarian Enterprise Structures, 2000 (%) EU-15 Hungary a Firms Empl. GVA Firms Empl. GVA No Employees - - - 30 11 1 Micro-enterprises b 89 28 21 59 26 9 Small Enterprises c 9 22 20 7 14 9 Medium-sized Enterprises d 1 17 19 3 16 18 Large Enterprises e 0.3 33 40 1 33 64 Definitions based on tax receipts. EU-15 definitions are additionally defined by turnover thresholds. a total number of Hungarian firms in 2000 was 289,081 (HCSO 2004a); b < 10 Employees; c 10-49 Employees; d 50-249 Employees; e > 250 Employees Source: MET (2002: 86), Eurostat (2002: 2). The divergence of the Hungarian enterprise structure is most evident in terms of the contribution to the country’s GVA. A further striking feature of the Hungarian enterprise structure is the large proportion of enterprises without employees. These single-employee firms account for a considerable share of employment. Although micro-enterprises employ over a quarter of the workforce, they contribute to less than a tenth of Hungarian value-added. Similarly, value added contributions of small and medium sized firms are below EU-15 averages. GVA in Hungary mainly originates form large firms of which 92% were foreign-owned in 2001 (MET 2002: 90).