Coronavirus crisis management through investment promotion: the sectoral and spatial aspects of the Competitiveness Enhancement Support Program in Hungary

Abstract

To fight the negative economic consequences of the pandemic, the Hungarian government launched the Competitiveness Enhancement Support Program, which offered direct, non-repayable grants for new investments by medium- and large enterprises. The article investigates whether the distribution of these grants reflects the structural feature of the Hungarian dependent market economy, namely the dominance of export-oriented foreign-owned enterprises, or, complying with the Hungarian government’s declared policy objective, the state aid mainly promoted domestically owned enterprises. The analysis relies on official beneficiary-level data of the Competitiveness Enhancement Support Program extended with information on the beneficiaries’ economic sector, ownership, financial data and number of employees.

The dataset reveals that among the 790 Srms that received aid through this measure in 2020, 28 per cent were foreign-owned and they secured 44 per cent of the total government support. The top 15 beneficiaries, which received more than one-Sfth of total state aid, were all foreign multinationals, mostly active in the automotive industry. The sectoral composition of the beneficiaries reflects the dependent characteristics of the Hungarian economy. Most of the grants to firms active in complex manufacturing benefited foreign-owned companies, whereas domestically owned firms secured the bulk of aid in construction, food processing, light industry, and the service sector.

The territorial distribution of the grants shows that aid was proportional to the economic power of the counties, which suggests that the program has reinforced rather than mitigated regional disparities. Furthermore, the results of multivariate analysis (OLS regressions) revealed that the program remained neutral in terms of aid intensity measured with total aid per employee because neither the foreign nor the domestic businesses enjoyed any advantages in aid intensity. However, large enterprises, on average, received higher aid per employee than medium-sized companies did. Overall, the paper finds that the beneficiaries of the program reflect the dual structure of the Hungarian economy both in sectoral and spatial terms. The findings suggest that the Competitiveness Enhancement Support Program, which has been the largest Hungarian investment promotion program in recent years, has reinforced rather than mitigated the economy’s sectoral and spatial inequalities.