Have Hungarian investments in Transcarpathia entered a new phase?

Abstract

While Transcarpathia has never been the main destination for Hungarian outward foreign direct investment (FDI), in 2009 Hungary became the fourth largest investor in the economy of the Ukrainian border county, accounting for a share of 10 per cent of total capital investments. The really interesting aspect of Hungarian investments in Transcarpathia is not the amount of the invested capital but the number and size of the investing companies. According to the data provided by the Hungarian Investment and Trade Development Agency, the number of Transcarpathian companies with Hungarian participation increased to over 250 in 2009, indicating a high proportion of Hungarian-owned small and medium-sized enterprises (SMEs) among the investors.

The aim of the paper is to explore the characteristics of the Hungarian companies investing in Transcarpathia, to identify both the source of their competitive advantages allowing them to expand abroad and their most important investment motives.

In the first part of the paper some theories explaining the internationalisation process of the companies involved are reviewed. The author has been relying mainly on the eclectic (or OLI) paradigm of John Dunning. The relevance of this paradigm was confirmed for SMEs as well. When examining the investment motives of Hungarian companies, several other theories should be taken into account because they reveal further issues concerning FDI activities.

Following a short review of the general characteristics of the Hungarian investments in Transcarpathia, the paper briefly presents the results of a survey carried out in 2010. Interviews revealed that in many cases, statistically Hungarian capital invested by the mid-nineties in Transcarpathia can be explained by the phenomenon of the so-called round-tripping FDI. As a cumulative result of the strengthening of Hungarian companies, the consolidation of Ukrainian market economic conditions and the tightening of border controls, the significance of roundtripping investments is gradually declining, and Hungarian FDI allocated for real investment purposes increasingly took its place in Transcarpathia.

The survey revealed that investment decisions by Hungarian entrepreneurs have been primarily motivated by market-oriented factors: The re-localisation of production and sales activities abroad opened up not only the Ukrainian but also the Russian markets due to the internal tariff concessions of the Commonwealth of Independent States. The specific advantages of Hungarian companies investing in Transcarpathia are related to a higher level of technology and to more developed production processes. All investors face a completely different, or at least unusual, business environment in Transcarpathia. In this risky and uncertain business environment, the advantages of Hungarian companies compared to their stronger Western European (for example, Austrian) competitors arise from the fact that – due to their former business and personal relations with the members of the Hungarian minority living in the region – they possess exclusive market information which hedges successful investments. The comparative advantages offered by Transcarpathia can be exploited mainly by a group of investing companies familiar with local conditions, aware of the unwritten rules of the Ukrainian economy or – with the help of reliable partners – can find their way in the labyrinth of legal uncertainties.

According to the survey, geographical proximity can be a key factor to receive information about the market because most Hungarian firms investing in Transcarpathia have their headquarters in Szabolcs-Szatmár-Bereg county, immediately adjacent to the Ukraine. In the case of FDI originating from the more distant regions of Hungary, generally personal or business ties linking the investor firms to the members of the Hungarian minority in Transcarpathia can be detected.

Transcarpathia which is located on the external border of the European Union provides unique comparative advantages for Hungarian SMEs due to its geographical proximity, to its peripheral character and to the significant number of ethnic Hungarians living in the region as a minority. However, companies are facing particular challenges and problems arising from the differences in the investment environments in the two countries at the same time. In order to increase Hungarian FDI in Transcarpathia and the number of SMEs to consider the Ukrainian stretch along the border as a promising investment opportunity, above all the business climate generally characterising the Ukraine should become more investment-friendly. This can be achieved primarily not by laws intended to attract foreign investors, but by a clearly visible presence of conditions identified with market economies and a more coherent and effective implementation of various reforms. The Ukraine is potentially a promising investment market for Hungarian companies, especially as just by size it is as big as all the other neighbouring countries combined.

It is expected that after the current political and economic crisis growth of the Ukrainian economy will exceed the European average from which – under appropriate conditions – also the Hungarian entrepreneurs can benefit particularly in such sectors as agriculture, information technology, the service sector, the food industry and mechanical engineering. Assuming that the Hungarian–Ukrainian border will remain the external border of the European Union for a longer period, the development of cross-border economic co-operation is a key issue for both countries.