- OVERVIEW OF THE ECONOMIC SITUATION IN THE TRANSITION PERIOD
At the beginning of the transition period (1988-1989), Hungary experienced a decline in production and living standards, accelerated inflation, unemployment, the incidence and growth of a fiscal deficit and other phenomena typical of an early stage in the development of a market economy, but the magnitude of these phenomena was not especially marked. Between 1990 and 1993, however, the situation swiftly deteriorated. The Hungarian economy contracted, production and living standards declined, inflation accelerated, and the fiscal deficit and unemployment rate grew rapidly.
Industrial production dropped by 44 per cent during this period. The most serious setbacks were in the engineering industry (60 per cent), the metal industry (55 per cent) and mining (50 per cent). The unemployment rate exceeded 13 per cent. However, the economy started to recover in 1994. Economic performance was good, with increases in industrial production, construction and agricultural production, and a drop in unemployment. But external economic indices deteriorated (current account and trade deficit, and a record increase in external debt), and the fiscal deficit grew to an unprecedented degree.
It was impossible to continue along the same path, and so the Government introduced the Economic Stabilization Programme in 1995. The main goals of the new export-oriented growth policy were to decrease the external debt, and the trade and fiscal deficit, and to improve the trade balance.
The statistics for the country's economic performance in 1995 reveal substantial economic growth and an improvement in the external trade balance. While Hungary's Gross Domestic Product (GDP) rose by 2 per cent in real terms, its industrial production grew by 7.4 per cent, and agricultural production increased for two consecutive years. In addition, the unemployment rate fell below 10 per cent. The most important factor in all this was a substantial upswing in external economic indices. The value of exports in US dollars increased by 21.5 per cent over the previous year and the trade deficit decreased by US$1.3 billion. The rate of increase in the volume of exports was 9 per cent more than that in industrial production. Direct investment reached US$4.5 billion in 1995, including the income from a successful privatization. This good economic performance in 1995 suggests that the Economic Stabilization Programme has been effective.
- OVERVIEW OF THE R & D SITUATION OF HUNGARIAN ENTERPRISES
Research and development (R & D) expenditure has been falling continuously since 1980. The decrease in real value was 53.7 per cent between 1988 and 1993, exceeding the 20 per cent drop in GDP for the same period. R & D expenditure in 1995 was 0.8 per cent of GDP. Enterprises' share in this expenditure has declined even more drastically. State R & D expenditure is now 60 per cent as opposed to enterprises' 40 per cent, whereas expenditure had previously been equal. Budget cuts are a severe problem affecting state R & D spending.
The number of R & D personnel has also decreased significantly. Many companies were forced to shut down their R & D units as a result of market loss. Erosion of the knowledge base was experienced particularly in the industrial research organizations because of a lack of contracts from industry. A similar but less marked trend can be observed in academic research.
- Development and change in the transition period
- Removal of administrative obstacles
Following the relaxation of COCOM restrictions, administrative obstacles to imports of technology have largely been removed. Owing to the difficult financial situation of Hungarian enterprises, advanced technologies are primarily made accessible through joint ventures. Imports of consumer goods have rocketed and have exerted a significant (and positive) direct and indirect effect on technological change.
- Radical changes in international science and technology relations
There have been radical changes in international scientific and technology relations. Hungarian researchers and R & D institutes can now participate in mutually advantageous international projects, which make crucial information available.
- Changes in market structure and effect of import liberalization
Changes in market structure and import regulations are providing a strong impetus for Hungarian firms to introduce new products/processes, thereby improving the conditions for enhancing competitiveness.
- Appearance of foreign companies in the Hungarian market
Foreign companies have also entered the Hungarian market and their impact on competition has not been negligible. Indeed, it is likely to become very significant since these companies have introduced new products and technologies as well as financial and marketing management techniques, thereby compelling Hungarian companies to be more innovative if they are to survive. The behaviour of foreign companies as buyers will now also need be taken into account since their requirements, e.g. reasonable prices, high quality and timely shipment, have a substantial influence on the performance of their domestic suppliers. Furthermore, increasing competition within, and for, the market of the former Council for Mutual Economic Assistance, once the single most important market for Hungarian companies, will require innovative efforts on the latter's part if they are to keep or recover their former market shares.
- INTER-FIRM COOPERATION AND ITS EFFECTS ON TECHNOLOGY
UPGRADING
A) Joint ventures
The main reasons for the formation of joint ventures in Hungary are profitability, market entry, rationalization, profile change, and use of a highly skilled labour force. Joint ventures have had a significant effect on closing the technology gap between Hungary and the rest of the advanced world. The case study of the Chinoin pharmaceutical company demonstrates the impact that the take-over had on technology (annex I). The firm had a technology advantage which it wanted to exploit abroad.
B) Foreign direct investment
Hungary has attracted the highest rate of foreign direct investment in the region - about US$15 billion. A total of 35 of the world's leading 50 multinational corporations have set up firms in Hungary. One example of foreign direct investment is the Suzuki green-field investment. The car industry is a new industry in Hungary, and production constitutes both product innovation and technology innovation. A new professional culture has been adopted. The investment, however, does not use the Hungarian R & D base, all such activities currently being carried out in Japan. It is the intention of the company management to gradually increase Hungarian experts' involvement in product development.
Another example worth mentioning is that of General Electric, which bought Tungsram, a light bulb producer. Unlike Suzuki, General Electric decided to transfer its R & D operation to Hungary because of its excellent and relatively cheap experts (annex II).
C) Suppliers' networks
The impact of the Suzuki plant is much greater than indicated above. The firm requires a growing number of component suppliers. The Ministry of Industry has started a programme to help subcontractors acquire the necessary technology and quality assurance by giving preference to small and medium-sized enterprises (SMEs). Although these companies do not represent high technology, it considerably improves their technology base for participating as suppliers. The only problem is with the scale of production (50,000 cars per annum), which might not make their participation profitable.
D) Joint research and development
Bilateral contracts between firms for R & D are quite rare. There are, however, a number of short-term consultancy and testing activities involving firms and research and technology organizations (RTOs), aimed at solving immediate problems. This is a good way of acquiring new know-how and making it available to a broad range of enterprises. One example is the establishment of the Clean Technology Centre, whose main task is to transfer and disseminate environmental technologies to Hungarian companies. Intermediary organizations play an important role in technology transfer. A number of such centres have been set up with foreign assistance for this purpose (quality development, logistics, productivity centres) and many more are likely to follow. Their advantage is that they help with the application of new technology within a firm, and offer extensive training courses.
E) One-way technology flow
This kind of cooperation is typical in Hungary. Many industries have updated their technology by licensing and by purchasing know-how. This is becoming, however, an increasingly difficult way for SMEs to acquire technology.
- TECHNOLOGY POLICY ISSUES
The Hungarian Government is in the process of adopting a policy for technical development as the driving force for modernization. The main issues can be summarized as follows:
A) Creating a more innovation-friendly climate for enterprises to increase competitiveness
Increasing emphasis is placed on the application of indirect measures such as tax relief, special tax treatment of R & D and investment, progressive depreciation, increasing the role of banks in innovation, easy access to long-term loans and setting up venture capital. The legal basis for intellectual property protection is already in place, but efforts must made to secure adequate enforcement, especially for software etc.
B) Ensuring efficient state intervention
Coordination between innovation and science and technology policies is necessary. Furthermore, their integration into the general economic reform process needs urgent attention. Clear objectives must be formulated, and coordination should be based on industry's needs and demands. A prerequisite for coordination is the presence of an information system. The use of state funds should be harmonized and accompanied by appropriate project evaluation.
Because of the limited amount of resources, efforts should focus on high-priority areas to be determined by sound scientific methods and consensus-building between the various actors. Infrastructure building, networking for interdisciplinary research, transfer sciences and inter-firm cooperation should be further supported. The scientific and technical skill base should be conserved. The restructuring of industrial contract research organizations is an efficient means of preserving a competitive and relevant knowledge base for industrial R & D.
Particular attention should be given to the innovation process in SMEs, the stimulation of demand for innovation using public procurement, quality control, and standards for technology-intensive products and services.