Tài liệu Competitiveness and economic policies related to foreign direct investment

COMPETITIVENESS AND ECONOMIC POLICIES RELATED TO FOREIGN DIRECT INVESTMENT


This paper was produced as part of the research project entitled ‘Economic
competitiveness: recent trends and options for state intervention’


September 2003


This paper reflects the views of the author and
does not represent the policies of the Ministry of Finance
Author: Magdolna Sass
MTA Közgazdasági Kutatóközpont
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Ministry of Finance
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Summary


Foreign direct investment may improve productivity through technology
transfer on the one hand, and it may also have other positive external effects through
corporate linkages (e.g. market access, or improved terms of financing) on the other
hand, thus promoting economic growth. These beneficial effects are not automatic,
though. Until the mid-nineties Hungary had played a leading role within the region
in attracting investments. After 1999, however, the country started accumulating
increasing competitive disadvantages as compared to its competitors. Even though
stock data adjusted for reinvested profits show less of a lag, the post-1999 figures still
indicate a gradual deterioration.


The positive economic effects of the foreign investments already in Hungary
have also fallen short of expectations. The most important positive impacts
comprised the competition from firms with foreign owners and the restructuring of
the economy. However, foreign-owned companies have established few linkages
with Hungarian economic actors, even though the number of such links has been
increasing.


In order to improve our capacity to attract capital it would be important to
improve the general investment environment by eliminating macro-economic
imbalances and by developing infrastructure as well as education and training. The
treatment of the corporate income tax as an incentive to attract investment and the
reduction of other taxes, contributions and local taxes would also be worth
considering. The institution system of investment promotion would also require
considerable changes: a single, more independent, more proactive organisation
would be needed with decision making powers and concentrating exclusively on
investment promotion. That institution must have a co-ordination role in granting
benefits.


Following our EU accession, the emphasis may be shifted to financial
incentives, with fiscal incentives diminishing in significance – while, because of the
EU regulations, the differences in investment promotion between Hungary and its
main competitors will become smaller, and the regional incentive competition will
lose some of its intensity. The system of investment incentives should be redesigned
in order to use arrangements allowed and cofinanced under the EU rules. At the
same time we must keep in mind that the EU places emphasis on compliance with
the aid ceiling rather than on the form of assistance.


The positive impacts of foreign direct investment on the host economy and its
integration into the host economy is at least as important as the attraction of new
investments, though these former are more difficult to influence with economic
policy instruments.


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