Hungarian Investment Promotion Agency (HIPA) President Róbert Ésik talks to the Budapest Business Journal about another record-breaking year in attracting FDI to the country.
What are the headline figures for the year, and how much did FDI grow over 2015?
Hungary is an outstanding target country for investment. It is clear that the popularity of Hungary is rising continuously among foreign investors. As solid evidence of this trend, the number of projects managed and negotiated by HIPA has been increasing each year.
HIPA closed a record year in 2016: A positive decision was passed in 71 investment projects supported by the agency. As a result, 17,647 new jobs will be created in Hungary with an investment of EUR 3.2 billion in foreign capital. In comparison to the previous year, the number of positively assessed projects increased by 6%, the volume of investment grew by 131%, and the creation of new jobs rose by 36%.
With regard to the sectoral and relative distribution of results in 2016, there were 15 projects from Germany, 14 from the United States, and seven from Hungarian companies. In terms of sectoral distribution, the automotive industry accounts for 25 projects, the business services sector (SSCs) for 12 projects and the food industry for eight projects.
It is important to note that of the 71 projects, 55 involved reinvestments, which suggest that the companies already established in Hungary are satisfied and remain confident in the country. This means that foreign investors greatly appreciate the quality of Hungarian labor, the advantages offered by the economic environment and the predictability of the political environment.
Which deal that HIPA was involved with particularly stands out, and why?
If I have to name one investment that is outstanding among all previous projects, both in terms of investment volume and the creation of jobs, it would be the second manufacturing unit implemented by Mercedes-Benz in Kecskemét. The plant built with an investment of EUR 1 bln, or more than HUF 310 bln, represents the largest ever greenfield investment in Hungary. The body, surface finishing and assembly plant – operating within a flexible production system – will be suitable for the manufacture of front-wheel and rear-wheel drive passenger cars. The investment will create 2,500 new jobs, further strengthening the vital role of the manufacturing unit in Kecskemét in the global production chain of the German premium brand.
What are the overall trends?
Several positive trends can be observed in relation to the key sectors. With regard to the automotive industry, increasingly complex and sophisticated activities are being introduced to Hungary in connection with vehicle manufacturing (e.g. tool manufacturing), or in the form of independent development activities (e.g. engine development). The two main directions in the automotive industry are self-driving cars and electromobility. In the prior case there are already two major German companies operating R&D centers in Hungary in the field: thyssenkrupp and Bosch. The shared service center sector remains one of the most dynamically growing sectors, ranked second in terms of newly created jobs in relation to projects managed by HIPA.
At the present time, the SSC sector employs more than 42,000 people, who commonly have higher education degrees and speak foreign languages, at roughly 100 locations in Hungary. The rise in the number of companies was accompanied by the increasing complexity of services provided, and the outsourcing of new, more complex processes to. The IT development and service centers operating in the infocommunications (ICT) sector are satisfied with the qualifications of the Hungarian labor force, which contributes to the continuous growth and expansion in the sector.
You have been trying to encourage investment into the regions, and particularly the east, where there are fewer jobs. Is this working?
Let me answer the question in a wider context. Generally speaking, low unemployment is now posing a challenge in the Visegrád Group countries in terms of encouraging investment. It is important to emphasize that there are significant regional differences relative to the 4.6% unemployment rate, so Hungary has many regions where a lack of labor does not arise as a problem. A clear and positive recent trend, which is supported by the government, is that rural municipalities and regions are becoming increasingly attractive to foreign investors. Since unemployment is higher in these regions, more labor and better conditions are available to investors. Moreover, there are university cities in the eastern half of Hungary that may serve as knowledge bases for investments involving higher added value. The investment of Lego in Nyíregyháza, of Flowserve in Debrecen, and of BP in Szeged are excellent examples of investment in eastern Hungary in 2016. In the latter two cases, for example, the university background and the availability of a large, highly qualified workforce were clearly key factors.
What is the share of FDI between Budapest and the rest of the country? After Budapest, which city attracts the most investment?
In terms of regional distribution, most projects (16) were implemented in the Northern Great Plain. Next came Central Hungary (15); Central Transdanubia (14); Northern Hungary (12); and the Southern Great Plain (12). The fewest number of projects were implemented in Western Transdanubia and Southern Transdanubia, with five and three projects, respectively.
If I had to pick a city, it would be Debrecen because it closed a very successful year in terms of investment.
The bimonthly investment supplement of the Financial Times, fDi Magazine, announces its “European Cities and Regions of the Future” competition every two years, collecting and ranking the most important European investment locations. The magazine contains two interesting and positive facts relating to Hungary. Firstly, the magazine still ranks Budapest among the top ten most attractive cities in Eastern Europe, and the capital is also listed in the top ten lists of three sub-categories of the most important European cities.
In addition, a Hungarian city other than Budapest earned a ranking for the first time: Győr was ranked ninth in the sub-category of the favorable business environment of smaller European cities.
In relation to these rankings, in fDi’s “Global Cities of the Future 2016/17” category, Budapest was the only city from the CEE region included on the TOP 25-FDI Strategy list. I think that these rankings, and the fact that all three credit rating agencies – Fitch, Moody’s and S&P – again rate Hungary among countries recommended for investment, further enhance the value of Hungary on investors’ maps.
What will be the priorities for this year? Will there be more targeted sectors/regions/programs?
In short, we have two clear objectives.In addition to the “Made in Hungary” type of projects, we will put a much higher emphasis on “Invented in Hungary” type of investments. This means that by benefiting from the renewed funding scheme, we aim to further increase the number of projects with high added value. As an additional priority, the share of investments implemented in rural locations should further rise. Economic and political stability, foreign policy focusing on the promotion of investment and foreign trade, and new measures improving competitiveness provide a solid foundation for these efforts. In relation to the latter, as of January 1, the corporation tax rate is reduced to 9%, which is the lowest rate in the EU.
In addition, as a first step, the social contribution tax levied on employers significantly declined from the same date, down five percentage points from 27%. In a further positive change, measures supporting the mobility of labor have been introduced, which may offer a response to labor-related challenges in the short term. The two key elements of the measures are the facilitation of commuting by car and the facilitation of employees’ residence. But we could also note the benefits available in relation to R&D activity performed within one’s own scope of activity.
Part of HIPA’s role as a one-stop-shop is to represent the needs of investors to government. If there was one law you could enact to improve things from an FDI perspective, what would it be?
In addition to the developments mentioned earlier, as of January 1 substantial and positive changes take effect within the scheme of non-refundable aids. The measures primarily target the promotion of R&D activities and technology-intensive investments. The HIPA website (www.hipa.hu) provides detailed information, but my colleagues and I would also be pleased to answer any enquiries from people who are interested, such as company executives.
As a most recent change to the funding scheme, funds based on an individual government decision (EKD) are available to a wider range of applicants in relation to the processing of agricultural products. EKD funds are available in Békés, Nógrád and Szabolcs-Szatmár-Bereg Counties for an investment value of as little as EUR 5 million, involving the creation of at least 50 new jobs.
I believe that beyond the above changes, there are additional opportunities to make Hungary even more attractive to investors. My colleagues and I are ready to draw up proposals for the government.