Aiming external markets: suicide or survival?

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Ever more Hungarian small- and medium-sized enterprises are interested in expanding towards external markets, however, without proper plans and funding, the move could prove suicidal. And funds are not easy to get nowadays…         

Hungarian small- and medium-sized enterprises are very interested in moving into foreign markets, last year's non-representative survey by Export Cooperation shows. While in 2011 only 20% of the responding SME-leaders were interested in external markets, by 2012 50% were thinking about exporting goods or services, or had already done so.

More possibilities abroad

Ever more Hungarian entrepreneurs are trying to expand beyond the country’s borders, for two main reasons. On one hand, more professional and government actors have embraced the idea of expansion beyond the borders: the government’s Foreign Trade Strategy has been completed, the activity of the Hungarian Investment and Trade Agency (HITA) has notably increased in the last year in terms of event organization and supporting SMEs. Also, in August 2012, tender GOP-3.3.3 was published, which aimed to help SMEs access foreign markets. However, due to the greater than expected interest, funding for the tender was quickly exhausted. Hopefully, more will come this year.

On the other hand, gloomy domestic economic trends are also pushing Hungarian SMEs towards foreign markets. Demand on the crisis-hit Hungarian market has fallen sharply, deeply affecting the SME sector; to reach sufficient growth, therefore, enterprises must turn towards external markets in the short- and mid-term. While those who can grasp the opportunities have a good chance to prosper from the situation, however, failure is always a possibility.

The latest reductions in the base interest rate might get banks more involved in start-up or SME-financing projects, but this probably won't affect the great masses of entrepreneurs as such investments carry much higher risk for banks. Unfortunately, the current financing system of banks does not benefit early-stage companies, the lenders being much more comfortable when there is some collateral taken into or revenue that can be factored into the risk assessment. Even if a small company succeeds in obtaining funding, it still has to provide 10-20% of own contribution.

Plans and patience

While there are plenty of possibilities on foreign markets, entering and gaining a foothold is not as easy as it might seem. “It’s not recommended to enter new markets without proper funds,” Iván Gyurácz Németh, a marketing expert for M27 Absolvo, told a recent conference. “A huge project like this could bring down the whole enterprise if something goes wrong,” he warned.

“The cultural gap is usually huge between Hungary and partner countries, that frightens Hungarians away from making business abroad. Also, little Hungarian tricks like tax evasion don’t work elsewhere. The business culture of target countries must be understood, and that rarely works without local help, but requires funds and patience,” said Krisztián Orbán, managing partner at Oriens.

“Export activity usually doesn’t provide any measurable result in the first year,” added Róbert Bödőcs, a department head at HITA.

While many entrepreneurs dream the export-dream, European possibilities seems to be limited, as the financial problems of many member states prevent Hungary’s largest economic partners, like Germany, from achieving more dynamic growth. (Last year €20 billion of total exports of €80 bln went to Europe’s largest economy, Germany, while less than €9.5 bln went to markets beyond Europe.) Besides the limited growth potential in Europe, the Hungarian investments level is currently under the level of amortization, meaning factories and machinery are slowly aging, and that will have a negative effect on product quality, warned András Szántó, head of retail services at Equilor. 

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