WORLD TRADE
ORGANIZATIONWT/WGTI/W/83
7 June 2000
(00-2257)
Working Group on the Relationship between Trade and
InvestmentOriginal:  English
THE NEED FOR A MULTILATERAL FRAMEWORK FOR FDI
THE HUNGARIAN EXPERIENCE
Communication from the Republic of Hungary
The following communication, dated 7 June 2000, has been received from the Permanent
Mission of the Republic of Hungary.
_______________
I. AT THE OUTSET
1. When Hungary, approximately a decade ago, embarked upon the process of economic
transition the country faced a complex and intricate set of grave, interrelated economic difficulties.
2. Perhaps most importantly the structure of the economy was not only distorted but also lacked
the needed mechanism for structural adjustments.  The strong bias towards heavy industry did not
reflect the country’s natural endowments and comparative advantages.  The financial sector was
underdeveloped and largely passive.  The basic infrastructure, including telecommunications and
transportation, lagged considerably behind the European average.  There was an acute shortage of
capital, modern technology and up-to-date management methods.  Partly as a result, much of the
industrial sector was energy-intensive and ineffi cient with widespread over-manning.  The bulk of
industrial production was absorbed by the CMEA market and was not marketable in developed
countries.  The sectoral and geographic composition of merchandise trade accurately reflected this
situation:  at the end of the 1980s agricultural pr oducts, raw materials and industrial products with low
added value accounted for over 60 per cent of H ungarian exports, of which only around 45 per cent
went to developed markets.  In sum, the international competitiveness of Hungarian products,especially industrial ones, was disturbingly low.  This was particularly alarming for a small country
like Hungary, which is so heavily dependent on foreign trade.
3. Furthermore, the regulatory framework prevailing in the preceding decades was not
particularly favourable for the accumulation and efficient use of capital.  To put it bluntly, at the start
of the transition the country was faced with the enormous task of economic restructuring with hardlyany domestic capital to invest.  To complete the picture it has to be added that Hungary was heavily
indebted externally.
4. These problems, to a considerable extent, were the effects of the centrally planned economic
system and the type of cooperation which existed among countries using similar economic policies.
Nevertheless, it is fair to say that most of the above problems are not unique to countries witheconomies in transition and are similar to difficulties encountered in many developing countries, in
various parts of the world.WT/WGTI/W/83
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II. THE POLICY RESPONSE
5. In the policy-mix devised to respond to these complex problems the liberalization of foreign
direct investment (FDI) played an essential role.  In order to enhance radical restructuring, at the
beginning of the transition process the Hungarian government opted for opening up the economy to
foreign competition, both in the form of imports as well as foreign direct investments.
6. A key initial step was to create an appropriate legal framework entailing improved
transparency and predictability to offer favourable conditions and needed stability for foreign
investors.  Thus, in 1988, the Law on Non-Reside nt Investment was adopted, which together with
other laws and regulations that govern business activities provides the legal framework for the
operations of foreign investors in Hungary.  It allo ws foreigners to create or expand a wholly owned
enterprise, subsidiary, representative office or branch or to acquire full or partial ownership of an
existing enterprise.  The legislation also provides for the repatriation of both capital and profits andprompt compensation for investment at real market value in case of expropriation.  For the
incorporation of a local entity it is sufficient to have it entered in the local Register of Companies.
Once established, enterprises with foreign participation are entitled to operate on the same conditions
as those that are owned solely by Hungarian nationals.  It is to be noted that in 1998 legislation was
introduced to permit branch offices and commercial representation offices of foreign-registeredcompanies, providing the same treatment for thes e entities as for other resident enterprises.
7. Beyond creating the necessary legal conditions it was also important to establish and operate
certain incentive programmes to attract and, more im portantly, to channel FDI into selected sectors,
activities or regions with a view to furthering a more balanced development of the national economy.
8. Privatization, a cornerstone of economic transition, was also fundamental in attracting FDI,
particularly in the first part of the 1990s.  Wit hout sizeable inward FDI the privatization process in
Hungary could not have been completed, at least not with this pace and efficiency.  In order to create
real ownership structures and thereby modern corporate governance in the mostly mismanaged public
enterprises the Hungarian government had opted for cash sales of state assets.  This was considered as
the best way to involve strategic investors and to raise needed budgetary resources in a relatively shortperiod of time.  Competitive tender procedures open to foreign bidders were established to ensure the
fairness and transparency of the transactions.
III. THE RESULTS/IMPACT ON THE HUNGARIAN ECONOMY
9. Over the last decade US$20.7 billion
1 was invested in Hungary and by the end of 1999 the
stock of FDI (paid in cash through the banking sector) surpassed US$19 billion (see Table 1 below
and Charts 1 and 2 in the Annex).  The cumulative  amount of per capita FDI invested in Hungary
during this period is even more impressive in international comparison and exceeds US$1900.
Table 1:  FDI Inflows to Hungary (figures in million US$)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Contribution in cash
Inflow 311 1.459 1.471 2.339 1. 147 4.453 2.275 2.173 2.037 1.944
Stock 569 2.107 3.424 5.576 7.087 12.82 9 14.961 16.086 18.517 19.276
Contribution in kind
Inflow 589 155  170 142 173 117 57 22 11 6
Source: National Bank of Hungary and Ministry of Economic Affairs, Hungary (2000)
                                                     
1 The figure includes in kind contributions.WT/WGTI/W/83
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10. The volume of FDI inflow was particularly  high in 1995 (US$4.6 billion) due to the
completion of major privatization projects in the energy sector:  majority stakes were sold in gas and
electricity suppliers and the two largest non-nuclear power plants.  After this peak year FDI inflows
stabilised at around US$2 billion per annum, a volume that the Hungarian Government wishes to
maintain in the long run.  At present, this am ount means that Hungary absorbs annual FDI inflows
that are approximately equal to 4 per cent of the country’s GDP.
11. At the beginning of the 1990s the pattern of investment inflows were characterised by a large
share of joint ventures involving minority foreig n stakes in Hungarian private- and state-owned
companies and a predominance of small- and medium-sized investor companies.  Later, larger
companies started to settle and today multinationals account for over two-thirds of the total
investment stock.  During the decade a substantial amount of FDI was centred around strategic
privatisation projects.  In the second half of the 1990s greenfield investments and capacity expansionprojects gathered momentum and played a more important role.  These developments reflected the
growing confidence of investors.  At the end of  1999 the proportion of greenfield projects stood well
over 25 per cent of the total FDI inflow.
12. Chart 3 in the Annex shows the sectoral com position of the FDI stock at the end of 1998.
During the first part of the decade close to 50 per cent of FDI occurred in the manufacturing sector.Later, parallel to increased investments in financial activities and related services and in the energy,
telecommunication, and transportation sector, this percentage decreased below 40 per cent.
13. While investments through joint ventures and privatisation projects cover virtually all sectors,
about two-thirds of greenfield investments have been concentrated in the engineering sector and
created new industries such as car assembly and automotive components.  Other manufacturingsectors that received substantial FDI inflows include the electronics, pharmaceutical, food and
beverages industries.
14. To put these figures into proper perspective, the overall impact of FDI inflows on the
Hungarian economy should be looked at.  Today a pproximately 35 thousand companies with foreign
participation operate in Hungary.  In 1998 these ventures produced 39 per cent of the GDP, gave53 per cent of manufacturing value added and accounted for 30 per cent of private sector jobs.
15. Between 1993 and 1999 Hungary experienced an extremely rapid growth in exports which
was directly linked to the presence of FDI.  As a result, between 1989 and 1999 exports rose by over
150 per cent and the country doubled its share in world trade.  The spectacular growth in exports was
coupled with drastic changes in the geographical and product patterns, both processes reflecting the
growing international competitiveness of Hungarian products.  In 1999 close to 90 per cent of
Hungarian exports was absorbed by the markets of OE CD countries, while a decade before this figure
stood at around 45 per cent.  The marked modernisation of the product pattern is even more
noteworthy.  The share of the machinery sector in Hungarian exports grew steadily in the last decade
and in 1998 represented over half of the total.  The share of high-tech products in exports showed a
similar trend, particularly in the second half of the 1990s.  This process, by 1998, resulted in a more
than 16 per cent share of high-tech products (from 2 per cent in 1992) and over 23 per cent of high-tech industries in Hungarian exports.  As anothe r important development the share of medium-high
technology industries has been growing even more rapidly.  The fact that by the end of the decade the
share of companies with foreign participation in Hungarian industrial exports rose to 80 per cent
illustrates the obvious link between FDI, structural adjustments, increased competitiveness and
technological advance.
16. The Hungarian economy in the latter part of the decade returned to a path of growth, the rate
of which in the past three years was higher than 4 per cent.  Since this growth was and still is strongly
export-oriented, it is to a large extent due to the performance of companies with foreign participation.WT/WGTI/W/83
Page 4
The economic upturn was accompanied by a steady decline in unemployment, which today stands
around 7 per cent, well below the European average.
17. FDI flows to Hungary have played a crucial role in enhancing economic efficiency, structural
adjustment and infrastructure development.  The in flow of FDI has helped to narrow the investment
gap arising between the level of domestic savings and investment, which is especially acute in thecase of developing countries or economies in transition with enormous modernisation needs.  In the
period of 1995-1999 FDI represented over 27 per cent of total fixed investments and also provided a
source of finance for the balance of payments deficit.  The restructuring of those sectors open to
foreign investment was more rapid and effective and was accompanied by above-average growth rates
in productivity and competitiveness in regional comparison.  Between 1992 and 1999 industrial
productivity improved by a yearly average of 10 per cent.  Similarly, inflows of FDI have played a
vital role in the restructuring of the financial sector, which is of crucial importance for the efficientoperation of a market economy.
18. In short, the Hungarian experience with the imp act of FDI liberalisation is very positive.  In
the past ten years inward FDI contributed significantly to the long awaited and all-important process
of structural adjustment, brought in modern te chnologies and management methods, as a result of
which efficiency and productivity improved considerably.  The competitiveness of exports increased,the trade balance improved and the inflow of FDI helped finance the deficit on the current account.  It
is undeniable that the inflow of FDI greatly c ontributed to the turnaround of the Hungarian economy.
19. Nevertheless challenges remain.  Efforts are needed to ensure in particular the improved
diffusion of modern technologies to local industries by e.g. backward linkages, a better utilisation of
Hungary’s skilled human resources in research and development and the closing of the developmentgap between the Eastern and Western part of the country.  In some of these fields positive tendencies
are noticeable.  Important greenfield investors are upgrading their existing assembly and production
plants with higher value added and R&D activities.  There are also signs of better integration of
companies with foreign participation into the local economy.
IV. CONCLUSION
20. When discussing the possible need for a multilateral framework for investment the question
usually arises:  why should a predominantly capital importing country support the multilateral
liberalization of foreign direct investments.  Hungary’s answer is rather simple:  as this paper aims to
show, inward FDI received during the past ten years in the wake of investment liberalization
contributed significantly to positive economic developments.  Consequently we would like to
maintain a stable and substantial inflow of FDI in the coming years and believe that a realistic
framework by improving legal certainty with resp ect to the entry and treatment of foreign direct
investments would bring stability and predictability for investors and host governments as well.  We
think that such a multilateral framework would lead to increased overall FDI flows and would help us
as well in our endeavour.  In our view, a real istic approach should concentrate on FDI and should
exclude volatile short-term capital flows, should be based on the principles of non-discrimination and
contain a positive list, GATS-type architecture ensuring sufficient flexibilities for Members inopening up sectors and should not allow investors to state disputes.  In addition, we are satisfied with
the operation of the GATS and feel that a multilateral investment framework along the above lines
would remedy the current, undesirable and illogical imbalance in the WTO system that while services
investors enjoy the benefits of GATS, no similar agreement serves the interests of manufacturing
companies.WT/WGTI/W/83
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Annex 1
Chart 1: Stock of Foreign Direct Investment in Hungary
0500010000150002000025000million USD
1991 1992 1993 1994 1995 1996 1997 1998 1999YearsStock of Foreign Direct Investment
Stock of cash FDI inflow In-kind contribution (cumulated)
Chart 2:  Foreign Direct Investment Inflows (year by year)
Foreign Direct Investment Inflows 
0500100015002000250030003500400045005000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Years
FDI inflow (cash) In kind contributio n Total FDI in Hun garyWT/WGTI/W/83
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Chart 3:   Sectoral Composition of FDI stock
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__________Sectoral Composition of FDI Stock (at the end of 1998)
Manufacturing Industry 
37%
Mining 1%
Agriculture, forestry 1%Utilities (Energy, Gas, 
Heating, Water) 14% Construction 2%Tourism 2%
Trade 2%Other 2% Real estate and 
business activities11%Financial activities and 
related services 11%
Telecom, transport 7%