Record-breaking Hipa Ready to Go Again in Search of Added Value

Analysis

István Joó, CEO of Hipa

The Hungarian Investment Promotion Agency has been something of a “serial offender” when it comes to setting new foreign direct investment records year on year. Still, even it will have its work cut out to maintain that form in 2024. Hipa pulled in a breathtaking EUR 13 billion in 2023, doubling the previous record, set only in 2022, of EUR 6.5 bln.

If those figures are impressive enough, the global context makes them even more so: According to OECD figures updated in October 2023, global FDI flows in the first half of last year were 30% below those recorded in H1 2022, and 44% down in Q2 on Q1 (oecd.org/investment/statistics.htm). The obvious question is: How did Hungary buck that trend so impressively?

“It was not easy to reach such an investment volume when you have less FDI searching for a location,” says István Joó, the CEO of Hipa. “Altogether, we closed 209 projects in 2023. [….] This success is partly thanks to the Eastern Opening Policy of the Hungarian government, which was launched in 2012 to intensify economic cooperation with our Eastern partners, especially China, Korea, Japan, India and some other countries as well,” he says.

“Nearly 82% of the industrial volume of last year came from the East. And the biggest chunk of that is the Catl investment in Debrecen, amounting to EUR 7.3 bln,” Joó explains.

It has become commonplace for Hungarian ministers to laud Hungary’s role as a meeting ground for Eastern and Western investors, particularly in the electrification revolution gripping the automotive industry. Think of China’s EVE Power, which is building a battery plant right next door to the BMW iFactory under construction in Debrecen, or the aforementioned Catl, which will supply Mercedes in Kecskemét.

“We have profited a lot from this Eastern-Western cooperation, and Western companies are knocking on the door of Hipa to bring their suppliers from China here to Hungary,” Joó says.

No Discrimination

But he is quick to point out that there is no “discrimination” between partners. Hungary may have opened its arms to the East, but it has not turned its back on its long-term investors from the West.

“Just to give you an example, Germany provided the most projects last year: 18. They were responsible for every fourth FDI deal,” Joó notes. The United States was another strong contributor, with eight projects. The two countries combined accounted for nearly 3,500 jobs or close to 20% of all new positions announced in 2023.

While China accounted for nearly two-thirds of the total investment volume, Hungarian companies invested the fifth largest amount.

“One of our missions is to help Hungarian companies to grow. Hopefully, this position will be better and better in the coming years,” Joó says.

Open for Business

The favorable business environment has been a crucial determinant in attracting FDI over the years. While sector-specific special taxes may have dented this a little, and international chambers of commerce have universally called for their removal, Joó insists Hungary is still very much open for business.

“We know that the extra profit taxes and certain extra taxes caused insecurities in some industries. But our ambition, generally, is to maintain the favorable business environment,” he outlines.

“The key is to keep the low level of taxes, the 9% corporate tax and the 15% personal income tax. And, of course, our ambition is to phase out these extra profit taxes as soon as possible. On the other hand, pharmaceutical companies can offset extra profit tax up to 50% by the amount of their investments. So, the more they invest, the less tax is due,” he adds.

“2022 and 2023 were exceptionally bad years for the world economy, and the government’s objective was to keep inflation under control. But for 2024, we have a much better outlook with significant GDP growth. If we analyze the share of reinvestments in the total volume, it is reassuring that both Eastern and Western companies are deciding to reinvest in the country. The Hungarian business environment is still the most competitive in Central Europe,” Joó says.

Electronics and automotive were again the dominant sectors in terms of attracting investment. The former alone represented EUR 9.3 bln in investment volume; the 30 automotive projects represent a combined EUR 1.7 bln. After that, however, the portfolio is quite broad-reaching across industries and services.

“I’d mention pharma and the food industry, and also the business services and shared services centers, because they are also well represented in our pipeline,” Joó notes.

Workforce Doubled

Indeed, in the last five years, the number of people employed in business service centers has doubled, the CEO says, to 100,000. Notably, many BSCs are opting for Hungary’s secondary cities away from the capital, with good schools and well-qualified potential workforces.

“By now, 25% of the workplaces established in the countryside are in the BSC sector, in university cities such as Debrecen, Szeged, Székesfehérvár, and many others. We inspire the business service centers to choose these countryside locations because the talent pool is significant. [….] And it is the goal of the Hungarian government to keep the talented people in the countryside,” Joó explains. More on this later.

Joó says the investment agency is not evangelical about any particular business. “We welcome investments in all sectors if they bring high-end value to the country, with good salaries, modern technologies, industry 4.0 solutions, and so on.”

Research and development is another area where the government has courted investment. Last year saw a “significant” milestone in that regard.

“Samsung SDI launched a huge R&D project in cooperation with some universities in Hungary, the largest yet in Hipa’s history. It’s important to mention because the government is heavily criticized by the opposition that we bring here only assembly factories, which is not true, of course,” Joó insists.

Geographic Spread

Where those investments go in the country also matters. Hungary has long been unusually Budapest-centric, and one of Hipa’s tasks is to encourage FDI toward what Hungarians call the vidéki, the “countryside.” Altogether, nearly 87% of 2023 projects were linked to a countryside location. This also makes good sense from a labor perspective, given that Hungary enjoys near total employment, though this is not equally true in all regions.

“In the last decade, we have concentrated on the east country, and we still have much to do in some smaller cities in northern Hungary. [….] Now, to balance industrialization, we have to shift towards the south,” Joó says.

Counties such as Békés, Baranya, Tolna, and Somogy have higher unemployment than the national average. The aim is to direct new investors to those regions of the country via higher subsidies to boost industrialization. And that policy has already borne fruit.

“BYD chose Szeged [for its EV production plant] just before Christmas, and CPMC, for example, chose Makó, which is close by [for its aluminum beverage can factory]. So, we have some results already in the southern part of the country, but we still have a lot to do in those regions. That’s why the government decided to designate 600 hectares as an industrial park in the vicinity of Pécs.”

This year takes on a special flavor for Hipa as it celebrates its 10th anniversary. Between Jan. 1, 2014, and Dec. 31, 2023, some 2,123 Hipa-guided projects were announced worth a combined EUR 49 bln that created more than 150,000 new jobs. What lies ahead? The step up from the 2022 record investment total to that of 2023 was steep. The EUR 14 bln question is whether Hipa can break it again in 2024.

“It’s a challenge, of course, for us to keep this level of inflow of FDI. And I think it’s too early to predict what will happen in 2024. But our goal is to attract investments that create higher added value for the country. We don’t know yet whether it’s possible to exceed the EUR 13 bln in investment. Of course, our objective will be to reach a record year again; we will see,” Joó promises.

“We have the financial means to continue our reimbursement promotion-related activities. This is important to highlight because we have experienced economic difficulties throughout Europe and in Hungary. But for the government, attracting new investors and new investments into the country remains a priority. All the financial means are available, not just for state subsidies but for infrastructure developments, as well.”

This article was first published in the Budapest Business Journal print issue of January 26, 2024.

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