GETTING READY FOR THE EU

BGF KKFK Elektronikus Könyvtár Az elektronikus könyvtár teljes szövegű dokumentumokat tartalmaz biztosítva a szabad információ-hozzáférést. A szerzői és egyéb jogok a dokumentum szerzőjét/tulajdonosát illeti. Az elektronikus könyvtár dokumentumai szabadon felhasználhatók változtatások nélkül a forrásra való megfelelő hivatkozással, de csak saját célra nem kereskedelmi jellegű alkalmazásokhoz.

Budapesti Gazdasági Főiskola KÜLKERESKEDELMI FŐISKOLAI KAR Külgazdasági szak Nappali tagozat Európai Üzleti Tanulmányok szakirány

GETTING READY FOR THE EU - SMEs IN THE HUNGARIAN ECONOMY BETWEEN 2002 AND 2004 -

Készítette: Szalay Beáta Budapest, 2003 1


Acknowledgements

I would like to express my gratitude to the following individuals: •

To the leader of EIC Budapest Miss Judit Lamperth for her valuable feedback on content and instruction. Without her help this work could not have been carried out.

•

To my dissertation supervisor Mr. Péter Renner for his time, patience and professional insight.

•

To Miss Katalin Major for her valuable assistance.

•

To my colleagues at EIC Budapest; especially Miss Georgina Fojta, Mr. Péter Rohr, Mrs. Judit Rixer, and Mr. László Zentkó for their time and co-operation.

•

To the committed employees of the Hungarian Foundation for Enterprise Promotion, who have helped me a great deal during my research.

•

To Mr. Gábor Szőllősi for his encouragement, wise advice and patience.

•

To Miss Andrea Igazi, for her help in providing me with updated statistical information.

•

To my family for their encouragement and support throughout all these year. Without their help this work could not have been carried out.

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Abstract Hungary’s policy towards small- and medium-sized enterprises has reached a turning point. In light of the accession to the European Union, the role of SMEs in the economic development and the importance of policy implication to strengthen them have been widely recognized. May 1, 2004 will begin a new era, confronting them with serious challenges that they have to be prepared for. The report provides a summary of the (policy) actions and implementation steps towards the promotion and development of SMEs, and to their preparation for the EU accession. Its main aim is to provide an idea about how well SMEs are prepared for the conditions of the Internal Market. Chapter one describes SMEs’ weight in the Hungarian economy bolstered by a battery of statistics. Chapter two discusses the current situation of SMEs and explores both their opportunities and threats in the mirror of accession. The paper also lists and explains the related policy measures offered by Hungary and the EU. Finally, it gives a detailed analysis of the activities of ITDH Euro Info Centre and evaluates its success. The study concludes that Hungarian entrepreneurs are still sufficiently unaware about the issues would be of utmost importance in light of the imminent accession. Therefore, during the preparation phase, it is necessary to collect and distribute widely information about the role of SMEs and the mechanisms and instruments available for the sector. This motivation of the research was to try and help entrepreneurs and interested readers alike to understand the requirements of the EU, to draw concrete conclusions and also take actions to fulfil them.

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Table of Contents

Title ............................................................................................................................................ 1 Acknowledgements ................................................................................................................... 2 Abstract ..................................................................................................................................... 3 Table of Contents...................................................................................................................... 4 List of Tables and Figures ....................................................................................................... 6

Introduction ................................................................................................7 1. State of SMEs in Hungary – General Overview ..................................9 1.1

Economic Environment ............................................................................................... 9

1.2

Definition of SMEs in Hungary and in the EU ........................................................ 10

1.3

SMEs Weight in the Economy................................................................................... 12

1.3.1 Number and Composition.......................................................................................... 13 1.3.2 Employment Share..................................................................................................... 14 1.3.3 Contribution to the Gross Value Added .................................................................... 15 1.3.4 Contribution to Export Performance ........................................................................ 16

2. Hungarian SMEs in light of the Accession.........................................18 2.1 Strengths and Weaknesses............................................................................................ 19 2.2 Opportunitites and Threats .......................................................................................... 21 2.3 Recommendations ......................................................................................................... 22

3. Hungarian SME policy ........................................................................23 3.1 Institutional Framework............................................................................................... 23 3.2 Historical Background .................................................................................................. 26 3.3 Széchenyi Plan ............................................................................................................... 28 3.4 Széchenyi Enterprise Promotion Programme ............................................................ 31 3.4.1 Main Pillars of SZVP ................................................................................................ 31 3.4.2 Financing................................................................................................................... 32 3.5 ‘Smart Hungary’ Investment Promotion Programme............................................... 34 3.6 National Development Plan .......................................................................................... 35 3.6.1 The Planning Process................................................................................................ 36 3.6.2 NDP Framework ....................................................................................................... 36 4


3.6.3 Components of NDP .................................................................................................. 37 3.6.4 Promotion of Enterprises and Investments ............................................................... 39 3.7 Public Procurement in Hungary .................................................................................. 40

4. EU Support for SMEs ..........................................................................43 4.1 Pre-Accession Assistance for SMEs ............................................................................. 44 4.2 EU’s SME Policy and Hungary.................................................................................... 44 4.2.1 Historical Background .............................................................................................. 44 4.2.2 Multiannual Programme for Enterprise and Entrepreneurship (2001-2005) .......... 46 4.3 Other Funding Opportunities ...................................................................................... 48 4.4 Hugarian SMEs in EU Public Procurement Process ................................................. 49

5. Activities of ITDH Euro Info Centre ..................................................51 5.1 Hungarian Investment and Trade Development Agency .......................................... 51 5.2 Euro Info Centre Network............................................................................................ 52 5.3 The Activities of EIC Budapest .................................................................................... 54 5.3.1 Answering Questions ................................................................................................. 54 5.3.2 International Projects................................................................................................ 57 5.3.3 Case Study: PAVE project......................................................................................... 58 5.3.5 Seminars .................................................................................................................... 61 5.3.6 Promotional Activities ............................................................................................... 64 5.4 Evaluation ...................................................................................................................... 65

Conclusion.................................................................................................68 Appendices .............................................................................................................................. 70 Bibliography............................................................................................................................ 76

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List of Tables & Figures:

Table 1.1: Definition of SMEs in Hungary and in the EU Table 1.2: Distribution of Major Indicators Characterising the Situation of Enterprises by Size Category, 2001 Table 1.3: Number and Distribution of All Employed by Enterprise Size, 1999-2001 Table 1.4: Contribution to Gross Value Added by Enterprise Size, 1999-2001 Table 1.5: Distribution of Export Sales by Enterprise Size, 1996-2001 Table 5.1: Answered Questions in Proportion of Total Questions at EIC Budapest, 2002-2003

Figure 1.1: The Proportion of Enterprises in Hungary and in the EU by Employment Category, 2000 Figure 3.1: Public Procurements Won by SMEs by Number, 2002 Figure 3.2: Public Procurements Won by SMEs by Value, 2002 Figure 5.1: Distribution of Questions Answered by Topic, 2003 Figure 5.2: Branch Distribution of Active SMEs in 2001

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Introduction During the past 12 years the Hungarian economy has undergone tremendous changes. With the disintegration of state owned enterprises and the change from planned to market economy, the structure of the Hungarian economy changed considerably in two ways: ownership and size pattern. The changes in the ownership coupled with the increase allowed for private ownership resulted in a significant growth in the proportion and weight of small and medium sized enterprises (SMEs). At the end of 1989 - the eve of the transformation statistics registered 300, 000 enterprises, while by the end of 1994 the number of the registered enterprises within the Hungarian economy exceeded 1 million. Since then, however, the number has barely increased. Following the period of political changes and economic transformation the Hungarian economy has become stabilized. In the proximity of accession, however, significant changes are underway again. The long-expected ratification of the Accession Treaty took place in Athens, on 16 April 2003, and set the time of accession on 1 May 2004. The biggest ever enlargement of the EU so far - both in terms of diversity and scope - is scheduled to take place when 10 new countries, namely Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia will join. EU Members in the Lisbon Economic Reform Agenda identified the strategic objective for Europe by 2010 as follows: to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic development with more and better jobs and greater social cohesion. As a new member, Hungary must find ways to contribute to this objective. The outcome will ultimately depend on the success of businesses and particularly of SMEs. SMEs are considered to be one of the principal driving forces in economic development, and constitute the vast majority of all business enterprises all over Europe. They play a central role in contribution to the gross domestic product, as well as in increasing economic growth and competitiveness, creating new jobs, providing services, implementing new ideas and progressing innovation. This is due to their private ownership, entrepreneurial spirit and their flexibility, as well as their potential to react to challenges in a changing environment. It is therefore no surprise that the issue of SMEs has demanded special attention and, over the

7


past few years, policies towards SMEs have been considerably developed throughout Europe. I think the reasons, why I chose SMEs as the central theme of my dissertation, are clear. The accession to the European Union means an historic opportunity for Hungary, in which SMEs play a vital role. Success largely depends on the readiness of SMEs; how they can adapt to the changing environment, and how they can exploit the opportunities given by the new, Single Market situation I was also motivated by my experiences throughout my placement at the Euro Info Centre in Budapest, about which I will detail in Chapter 5. It is important to draw people’s attention to the importance of collecting and offering information about the European Union and the opportunities offered by now and after the accession. The topic is up-to-date and relevant. There are threats, which have to be avoided, problems, which have to be solved, and opportunities, which have to be exploited - possibly before the accession in order to minimize risks. To reach this aim businesses have to see clearly what the pre- and after-acession context really means.

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1. State of SMEs in Hungary – General overview In order to be able to assess the situation of SMEs first it is necessary to analyse the macroeconomic environment in which they operate at the present. Then I will give the legal definition for SMEs in Hungary, comparing it with the definition given in the EU, and will support my argument concerning the importance of SMEs with a battery of statistics. In the third part of this chapter I will draw the reader’s attention of the reader to the opportunities and difficulties arising with the accession.

1.1 Economic Environment According to the ECOSTAT the performance of the Hungarian economy lagged behind the planned and forecasted values in the first half of 2003. The greater depth and length of the recession of the global economy than previously forecasted has significantly reduced the growth potentials of the Hungarian economy. Although the world economy has been exhibiting signs of improvement, there is a time gap before the impact of prosperity can be sensed in Hungary.1 The growth of the Hungarian economy – as in nearly each quarter since 1999 – was in harmony with the GDP growth-rate of the Euro-zone. The rate of GDP growth slowed, from 2.7% in the first quarter of 2003, to 2.4%. The low growth rate is also accompanied by a decreasing current account balance and a high fiscal deficit. The budget deficit grew beyond HUF 750 billion in September, already 3/4 of the yearly predictions and is forecasted to reach HUF 850 billion by the year-end. The deficit in the current balance of payments was € 2.1 billion. The volume of investments increased by 0.6% in the first half of 2003 although manufacturing investments increased by 4.1% in the first half of the year. The industrial production was rather varied this year; the 8.5% increase in July was followed by 3% decrease in August. Export sales still exceed domestic sales. The increase in household consumption expenditure fall back in the second quarter of 2003 but it is still above the GDP growth. Consumption is still stimulated by the effects of public servants’ wage increase last year and tax relief on minimum wages. An overall figure for 2003 is calculated to be between 6-7%. 1

http://www.ecostat.hu/print.html/hirlevel/hirlevel37.html - 30 October 2003, 21:15

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Consumer price increase was under the targeted figure in August but is expected to rise in the second half mainly due to the increase in food prices. Inflation is expected to reach 4.7% on yearly average. According to a survey by ECOSTAT, the SMEs’ prosperity index in August, 2003 was 42.7%, which is 2% lower than in July. The business confidence index of the sector has been decreasing since June and it has almost reached its lowest value in the last two years. This deterioration is mainly due to the low performance of the Hungarian economy and the strict fiscal policy expected for next year because of the high budget deficit. 15% of the entrepreneurs expect better performance of the national economy in the following period, 1/3 assume stability, and 55% predict deteriorating conditions. Considering future expectations of their own company they are somewhat more optimistic. More than 1/5 hopes improvement, and 50% of respondents indicate a constant level of performance in turnover. 25% assume slightly and 7% significantly worse performance. 66% forecast no change in export opportunities, while 16% expect better positions. As regards the short-term change in their financial position, 35% predict a deteriorating liquidity.2

1.2 Definition of SMEs in Hungary and in the EU A common definition of what constitutes an SME is crucial as it is used as the basis for decisions on supporting instruments. This means that the various categories of SMEs have to be defined in an unambiguous and economically fair way, which is legally secure for the enterprises and easy to apply by the state administration. Adoption of a uniform definition is an important part of the harmonization of the SME acquis, as the lack of coherence in this field may cause problems when implementing specific SME-related schemes and programmes. However, the categories offered by the EU are only a recommendation, and are by no means obligatory. Both in the EU and in Hungary SMEs are classified by three criteria: -

number of employees

-

annual turnover or annual balance sheet total

-

and the so-called criterion of independence.

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The Commission Recommendation (EC) No 96/280 defines SMEs as enterprises of less than 250 employees, having either a maximum annual turnover of EUR 40 million or an annual balance sheet total not exceeding EUR 27 million. They also have to meet the requirement that 25% or more of the capital or the voting rights may not be owned by either one enterprise, or jointly by several enterprises falling outside the definition of an SME. A micro-enterprise is further distinguished as an enterprise of less than 10 employees. A small enterprise has fewer than 50 employees and reaches either a maximum annual turnover of EUR 7 million or an annual balance sheet total at maximum of EUR 5 million. Medium enterprises are those above the category of small enterprises.3 Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises - will replace Commission Recommendation (EC) No 96/280 as of January 1, 2005. Criterion regarding the staff number will be unchanged, while financial indicators will be increased. The new regulation adds to the definition of micro-enterprises the criteria that their annual turnover and/or annual balance sheet total may not exceed EUR 2 million. In the case of small enterprises the annual turnover and/or annual balance sheet total is determined in EUR 10 million. Regarding medium-sized enterprises annual turnover will be increased to EUR 50 million and annual balance sheet total to EUR 43 million. These changes are necessary because of the increase in inflation and productivity since 1996. The European Commission also argues that changes will improve investments, ease access to venture capital, and reduce administrative burdens.4 According to Act XCV of 1999 on the Small and Medium Sized Enterprises and the Promotion of Their Development, the categories esteblished for the number of employees used in Hungary are the same as in the EU, while considering the annual turnover and the annual balance sheet total the Hungarian limits are lower than recommended. See Table 1.1 for comparison.

2

Konjunktúra-indexek. ECOSTAT – Gazdaságelemző és Informatikai Intézet, 28 August 2003, p. 13-19 Commission Recommendation (EC) No 96/280 of 3 April 1996 concerning the definition of small and medium-sized enterprises 4 Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, C(2002)/1422 3

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Table 1.1: Definition of SMEs in Hungary and in the EU5 Number of employees EU Hungary -10 persons -10 persons Micro 10-49 persons 10-49 persons Small Medium 50-249 persons 50-249 persons

Annual turnover EU Hungary

Annual balance sheet total EU Hungary

-7 m € -700 m HUF6 -5 m € -500 m HUF -40 m € -4000 m HUF -27 m € -27 m HUF

The economic portfolio of Hungary plans to modify the act to comply with EU recommendations. Its draft proposal will probably be discussed in the Parliament in January so that it could become effective before the accession. This change will extend the number of enterprises entitled to subsidies, but at the same time it will decrease the chance of “real” small and micro enterprises to get resources. The operating capital possessed by Hungarian enterprises is quite small compared to European ones, hence too many enterprises will be considered SMEs. Differences between capital and efficiency would favour enterprises earlier considered as large. In the new situation it will also be difficult to enforce the interest of small enterprises.

1.3 SMEs’ Weight in the Economy The essential structural features of SMEs have hardly changed recently; their business management is characterized by high labour and low capital intensity. The Hungarian SME sector has a significant role in employment but their GDP contribution is still moderate compared to the EU average. (See Appendix 1 for more comparison.) Their share of exports is also low and is decreasing year by year. The discrepancy is chiefly due to the great number of “forced entrepreneurships” in Hungary, which is expected to decrease after the accession.

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A leggyakoribb kérdések a magyar európai uniós csatlakozásról (Frequently Asked Questions about Hungary’s Accession to the EU). Magyar Köztársaság Külügyminisztériuma, Budapest, 2002, p. 43 6 Official HNB exchange rate: 1 € = 258.07 HUF – 14 November 2003

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Table 1.2: Distribution of major indicators characterising the situation of enterprises by size category, 20017 (%)

Number Number of employees Net turnover Gross value added Capital Exports

Micro SME Ent. Small Medium Large Total 1-9 total without employee employee 64.3 32.0 3.0 0.6 0.1 100 99.9 11.6 1.6

26.9 11.7

13.8 7.9

15.1 17.8

67.4 39.0

32.6 61.0

100 100

1.2 1.3 0.3

9.3 4.2 2.7

8.7 3.0 2.6

16.5 9.0 11.0

35.7 17.5 16.6

64.3 82.5 83.4

100 100 100

1.3.1 Number and Composition Focusing solely on the number of registered enterprises in Hungary, one may conclude that it is high - even compared to the EU average. This fact, however, is quite misleading since the majority of operational enterprises have fewer than 10 employees and thus belong to the micro-business sector. Statistical surveys first revealed the number of active enterprises within the registered group in 1995. Then the rate of active enterprises was 57.5%, which has reached 74.6% by 2002.8 This clearly manifests that although the proportion of non-active, so-called “forced entrepreneurships” is decreasing, but it is still very high. They are established under the pressure of the founder’s earlier or current employer, mainly for cost accounting reasons. Greater attention must be paid to the self-employed as their role in employment must be reinforced.

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State of Small and Medium Sized Business in Hungary Annual Report 2002. Hungarian Institute for Economic Analysis 2002, p. 2 8 Calculated by the author after statistics of the Hungarian Institute for Economic Analysis, http://kfi.matav.hu/kfi5/statistics.htm - 10 October 2003, 12:03

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Figure 1.1: The proportion of enterprises in Hungary and in the EU by employment category, 2001

70%

64.0%

60% 50%

49.0%

40%

44.1% 32.0%

30%

Hungary EU

20% 10% 0% Sole proprietors

1-9 employees

5.9% 3.2%

0.6%0.8%

10-49 employees

50-249 employees

Number of Employees The table indicates that the proportion of micro-enterprises in Hungary is much higher then in the EU, but at the same time the proportion of small- and medium enterprises is significantly lower. For this reason in Hungary the economic importance and the development-forcing role of the entrepreneurial sector is not as high as in the industrially more advanced countries. The increasing number of micro-enterprises is still typical while the number of the most productive medium-sized ones is stagnant or slightly decreasing even. Thus to improve their significance and profitability is of vital importance. 1.3.2 Employment Share Since the aggregate proportion of micro and small enterprises is slightly under 100% they have an outstanding role in employment. Table 1.4 shows below the overall employment effect of enterprises (ratios refer exclusively to the competitive sector, and do not cover public sector employees).

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Table 1.3: Number and Distribution of All Employed by Enterprise Size, 1999-20019 Employed (person) 1999 2000 2001 Enterprise without 332 107 325 799 346 370 employee 745 230 774 245 803 599 Micro 419 332 414 227 411 501 Small 545 288 459 293 452 151 Medium SME total 2 041 957 1 973 564 2 013 621 948 209 981 821 976 149 Large 2 977 736 2 955 385 2 989 769 Total

Distribution (%) 1999 2000 2001 11.2 25.0 14.1 18.3 68.6 31.8 100.0

11.0 26.2 14.0 15.5 66.7 33.2 100.0

11.6 26.9 13.8 15.1 67.4 32.6 100.0

Source: Computation based on tax returns

The data in the table indicates that nearly 70% of the people are employed by SMEs and only 30% by large enterprises. Within the SME sector a significant proportion is represented by micro-enterprises. The 67% share of SMEs in the entrepreneurial employment sector is slightly above the EU1910 average. The average meanwhile embraces significant differences between member countries. This rate is significantly under the EU-average, for example, in Ireland (49%), but much in excess of the average in, for example, Italy (80%). Looking at the three groups of SMEs separately, the differences among EU members are even greater, changing from 18% (Ireland, Luxemburg) to 48% (Italy). Hungary’s 36% figure is close to the average (34%).11 1.3.3 Contribution to the Gross Value Added The contribution of the different-sized enterprise categories to the gross value added is defined on the basis of the difference between their respective production inputs and outputs. This figure, together with the balance on product taxes and subsidies, is equivalent to the GDP. When assessing the performance of the Hungarian economy, changes in the gross value added deserves special attention. It is very important to know what factors determine the 9

State of Small and Medium Sized Business in Hungary Annual Report 2002. Hungarian Institute for Economic Analysis: 2002, p. 88 10 EU-19: the 15 countries of the EU, plus Iceland, Liechtenstein, Norway and Switzerland 11 http://europa.eu.int/comm/eurostat - 25 October 2003, 14:19

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increase of the gross value added, and to what extent. Between the period of 1996 and 2001 these factors were as follows: •

5.3-5.5% increase in the number of employees

•

46.2-46.8% rise of the capital asset of enterprises

•

48.3% improvements in work- and capital intensity.12

Table 1.4: Contribution to Gross Value Added by Enterprise Size, 1999-200113 (%) 1999 Enterprise without employee Micro Small Medium Large Total

1.2 8.3 8.9 17.0 64.5 100.0

2000 1.1 8.7 8.7 17.0 64.5 100.0

2001 1.2 9.3 8.7 16.5 64.3 100.0


It appears that the proportion of the contribution of different-sized enterprise categories to the gross value added did not change significantly between 1999 and 2001. The table also indicates that the enterprises having the biggest chunk in the sector (enterprises without employee) contribute least to the gross value added. At the same time, the contribution of medium-sized enterprises to the gross value added is greater than their number would justify, which shows that they are more efficient. The difference between the size structure of enterprises in Hungary and in the EU is also reflected in the sector’s GDP contribution. The SMEs’ contribution to the GDP in the EU is about 60% while in Hungary it is slightly above 50%. 1.3.4 Contribution to Export Performance As for the distribution of export sales, the contribution of large enterprises has increased markedly since 1999 and is now 83%. This number indicates how moderate the contribution of the SME sector to export sales is in Hungary. Moreover, their share has declined in every size category. Most small enterprises sell their products and services on the domestic

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Tamás Mészáros, Zoltán Pitti: A vállalkozási szerkezet módosulása, különös tekintettel a középvállalkozásokra és az EU-sajátosságokra, Európai Tükör 2003/1, p. 60 13 State of Small and Medium Sized Business in Hungary Annual Report 2002. Hungarian Institute for Economic Analysis, 2002, p. 94

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BGF KKFK Elektronikus Könyvtár Az elektronikus könyvtár teljes szövegű dokumentumokat tartalmaz biztosítva a szabad információ-hozzáférést. A szerzői és egyéb jogok a dokumentum szerzőjét/tulajdonosát illeti. Az elektronikus könyvtár dokumentumai szabadon felhasználhatók változtatások nélkül a forrásra való megfelelő hivatkozással, de csak saját célra nem kereskedelmi jellegű alkalmazásokhoz. 14

market; only a total of 7.5% of their revenues are generated by export. Small and mediumsized enterprises could simply not retain their exportability. The small enterprises export to the markets of the developed countries under the average, the large ones over the average, whilst the export-range of medium-sized enterprises lies in between the two. This obviously shows the difference in their export potentials. Table 1.5: Distribution of Export Sales by Enterprise Size, 1996-200115 (%) 1996 Enterprise without employee Micro Small Medium Large Total

3.9 9.3 10.8 22.2 53.7 100.0

1997 1.3 9.3 8.9 17.3 63.1 100.0

1998 1.1 7.8 9.7 16.5 64.9 100.0

1999 0.4 3.5 3.4 12.3 80.4 100.0

2000 0.4 3.2 3.0 11.9 81.6 100.0

2001 0.3 2.7 2.6 11.0 83.4 100.0


14

http://www.ecostat.hu - 2 November 2003, 16:27 State of Small and Medium Sized Business in Hungary Annual Report 2002. Hungarian Institute for Economic Analysis, 2002, p. 98

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2. Hungarian SMEs in light of the Accession This part of my dissertation deals with the present situation of SMEs, examines the opportunities and threats presented by the EU accession, and outlines a few recommendations about how to minimize the risks associated with next May. The examples of earlier EU enlargements have clearly shown that for existing member states the accession represents a great opportunity to further improve. Managing the effects of accession has caused problems of different nature and gravity to the variuos countries, depending largely on the country’s level of readiness and the extent to which it was prepared to adapt to community guidelines. Benefits are expected from both ends. The addition of more than 100 million people, all from rapidly growing economies, to the EU market of 370 million will certainly boost economic growth and create jobs in both old and new member states. At the same time European citizens’ standard of living is likely to improve, as the new members will further adopt compulsory EU policies as regards environmental protection, the fight against crime, drugs and illegal immigration. Enlargement will also strengthen the Union’s role in world affairs – in foreign and security policy, trade policy, and the other fields of global governance. With the enlargement the EU will have become the world’s largest exporter having an almost 20% share in global exports. Trade within the EU will also increase by an additional 9%.16 Hungary’s economy, as that of a new member state is expected to develop faster because of integration. Accession will further strengthen the predictability and stability of the economic environment and will considerably increase the efficiency of European companies investing in Hungary. Other impacts include the elimination of internal frontiers, which people will observe immediately after the accession. A common regulatory framework provided by the Single Market will increase the overall efficiency of the economy by improving the allocation of resources, increasing the degree of specialisation and enhancing competition. Non-member countries will also benefit from an enlarged Union. A single set of trade rules and administrative procedures will apply across the Single Market of the enlarged Union.

16

Enlargement – What can Enterprises in the New Member States Expect? Enterprise Publications, European Commission, 2003, p. 7

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This will simplify dealings for all firms within Europe and improve conditions for investment and trade, bringing benefits not only to the EU but also to its trading partners all across the world. The SMEs, which form the basis of the economy, are particularly exposed to the numerous changes in the business environment, induced by economic restructuring and preparations for accession. In the following sections I will explore the impact of accession on the Hungarian SMEs, in line with the main theme of my dissertation.

2.1 Strengths and Weaknesses The primary strengths of Hungarian SMEs are their flexibility, innovative capabilities and creativity. The key to their success lies in their organizational structure and flexibility to external shocks. The small number of employees, the absence of a bureaucratic structure and the ease of re-engineering their production capacity makes them particularly strong in times of crisis. They are likely to innovate via the introduction of new organizational approaches to enhance productivity, or the development of new techniques to expand sales. Their inventiveness is shown by their swift reactions. The quick and efficient production changes, along with the simultaneous engagement in several lines of operation are traditional values of SMEs and form the key to their competitiveness. The frequent alterations in the legislation have forced entrepreneurs to adapt quickly to the modified requirements. The majority of enterprises have a long experience in business. In the past few years multinational companies had a strong presence in Hungary and have selected their suppliers on a competitive basis. Many enterprises became suppliers of these multinationals and thus learnt to adapt to international requirements and standards. Weaknesses include technological backwardness caused by the lack of capital. The absence of advanced technologies causes shortcomings in quality and speed. According to a recent survey concerning the application of information technologies in SMEs, 72.4% of entrepreneurs have computers, and among these, 53.7% use the Internet. These numbers are significant and show quite an improvement. On the other hand however, almost half of those (47.2%) possessing computers have only one, 23.6% have two and 29.2% have three or more computers. Among those with Internet connection 3/4 have only one computer 19


available for using the Internet. More than half of the entrepreneurs interviewed spent less than 200 000 HUF (~ EUR 775) on computer technology. This means that SMEs’ IT infrastructure does not keep pace with the rapid development of technology.17 Proper tools and using information technology are required to ensure quick and flexible communication with clients and partner organizations, and to meet changing demands. SMEs should develop in this respect, both in terms of equipment and knowledge. SMEs often lack the necessary financial and marketing knowledge; they prefer to concentrate on technical skills. A great number of SMEs are experts in their own products and/or services, but lack considerable managerial skills such as marketing, innovation and financial planning. Neither can they afford to employ personnel familiar with these issues. The also lack information and knowledge about the EU market conditions. The majority of SMEs are unclear about the advantages and disadvantages of the accession. Several surveys have revealed that only multinationals are fully ready for EU accession. With reference to the CAPE Survey 200218, only 53% of companies are fully (10%) and partly (43%) informed; while 28% claim “having no information”. 55% admit they do not sufficiently exploit the available information, while 25% describe the situation only slightly better than in 2002. The most significant obstacle to growth is the lack of capital and the uneasy access to financial resources. Early stages of growth are marked by uncertainty both in production and marketing. Smaller, innovative firms operate in environments of high complexity and rapid change and rely heavily on intangible assets. SMEs often have trouble obtaining financing, because banks and traditional lending institutes are averse to risky ventures. SMEs frequently suffer from cash flow problems, often caused by late payment of their customers. Many SMEs have problems in following legal regulations. Legislation is a necessary regulator to protect the business environment, to ensure employees’ health and safety and to lay down the respective social security rules. At the same time, however, it hampers 17

Katalin Kiss: Tanácsadás a kis- és középvállalatok esetében az EU csatlakozással kapcsolatban, (Consulting among SMEs in accordance with EU Accession), Humánpolitikai Szemle, XIV. évf., 2003/7-8, p. 44-45 18 http://www.signform.be/cape/Survey2003.pdf - 3 November 2003, 9:24

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business by imposing additional costs and administrative barriers. Large companies may assign a portion of their staff to deal exclusively with studying new regulations and ensuring the compliance of company operations. For SMEs, this would be a high cost, given the size of their businesses. SMEs often bear a disproportionate burden in complying with too many regulations and procedures, especially in the start-up phase. Such pressure of regulatory requirements can be a setback in one of their strengths - namely flexibility - and can lead to business failure.

2.2 Opportunities and Threats Becoming a member of the Union will bring new opportunities for actors of the business environment. In order to take advantages of the changes it is essential that SMEs consider accession as an opportunity to develop and reform. They need to adapt to the changed environment, capitalizing on the new situation. The elimination of internal frontiers and the free movement of goods will significantly facilitate and speed up transportation between and distribution among the member states and will therefore make these operations less expensive. This new situation will pose a risk but it will also offer an opportunity for Hungarian SMEs to go global and improve their competitiveness. In a larger market production levels will increase, and that will lead to higher productivity and economies of scale. SMEs, however, will have to face increased competition in the Single Market. In such a competitive environment quality, reliability, speed and environmental protection are the key values. Improving these factors, however, presumes innovation and capacity. Thus, in this competitive environment, the smallest enterprises are most likely to be damaged, due to capital shortage, limited modernization opportunities, and almost non-existent chances of starting a new business outside the micro-region. Increasing competition among financial institutions as a result of the free flow of financial services across borders will hopefully improve the level of their services and moderate their profit margins. Loans will possibly be offered with easier access and better conditions and they will be a basis for enhancing competitiveness.

21


The usual tools of small companies to gain price advantage – such as the minimum wage employment, the so-called virtual companies and the bypassing regulations - will disappear in the Union. In certain cases complying with regulations may result in higher costs, which needs to be offset by increased efficiency and productivity. Safety at work and compliance with safety regulations will also be more important issues in the European Union.

2.3 Recommendations Globalisation

of

competition

requires

successful

and

forward-looking

company

management systems that are based on strategy and focused on business. In the light of today’s business environment all SMEs have to ask themselves some questions, even if they want to go on with their local strategy and if business outside their traditional region has no strategic logic: •

Could co-operation with international partners/suppliers enable us to provide added value to our customers?

•

Would such cooperation improve our profitability?

•

Is there a chance that an international competitor –able to offer the same personalized service by employing new IT and sophisticated logistics solutions – enters our local market?

If the organization expects such a situation, it should quickly start to develop a suitable strategy that offers a solution to these new environmental conditions. Most of all they should consider exporting as a strategic option. Small firm networks, clusters and syndicates may be the most expeditious path to a dynamic SME sector. Grouped in local systems of production, SMEs can often be more flexible and responsive to customer needs than large, integrated firms. They can pool resources and share the costs of training, research and marketing. Clustering facilitates exchange of personnel and the transfer of technology, also creates new possibilities for efficiency gains. From a company’s view-point to be prepared for membership means the adoption of the EU legislation, the “acquis communautaire”, understanding the EU market and being ready for market competition. 22


3. Hungarian SME Policy The basic rationale why governments support SMEs is that they, on the one hand, lack the competitive edge needed to secure financing. There is also the relatively higher administrative cost involved in complying with government regulations, including tax legislation. On the other hand, there is the argument that such companies are much more flexible and dynamic and thus contribute to overall economic growth.

3.1 Institutional Framework This section presents organisations and networks promoting the development of Hungarian SMEs, without aiming at completeness. The institutional framework of enterprise promotion is very complex and is composed of several elements, including public administration organisations, the system of chambers of commerce, the network of enterprise development centres, organisations supporting technical and trade development, as well as interest representation groups, associations and foundations. Enterprise Development Council (VT) Although it was already established in 1995, its main role and structure has only been set in the Act on the Development of Small and Medium-Sized Enterprises and the Promotion of Their Development of 1999 (see details in the next section). According to the Act the VT makes recommendations for and expresses its opinion on the programmes and measures serving the basis of the SME strategy. It makes an assessment of the effectiveness of ministry programmes and enterprise-promotion organisations that are financed from the national budget, and evaluates the distribution of the budget appropriation for SMEs. According to the Act, members of the VT are the Ministers for Economy, Agriculture and Rural Development, Environmental Protection, Education, Finance, Social and Family Affairs, the minister in charge of co-ordinating PHARE programmes, a representative of the Prime Minister’s Office, the chairmen of national chambers, and five representatives of the national organizations that represent the interests of SMEs. The VT meets at least four times annually.19

19

Act XCV of 1999 on the Small and Medium Sized Enterprises and the Promotion of Their Development

23


Hungarian Enterprise Promotion Public Benefit Company (MVF) In 1999 it was established with the objective of promoting the sector of SMEs in its development. Since 2001 its only proprietor is the Hungarian government. The MVF works as the operational background organization of the Ministry of Economy and Transport (GKM) in carrying out its strategic functions. Its main objective is to carry out effectively the tender application process and operate the state support programmes to promote the realization of the national economic development objectives. It plays an important role at all levels of tender applications, including initial publication and provision of information to potential bidders, reception and evaluation of tenders, conclusion of contracts, financing and monitoring. It also contributes to the continuous improvement of the application system. It operates in partnership with the GKM, and other local, regional and national organizations of enterprise promotion, including the Hungarian Foundation for Enterprise Promotion (MVA), and the Regional Development Holding Company (RFH). Hungarian Foundation for Enterprise Promotion (MVA) and Local Entrepreneurial Agencies (HVKs) The MVA/HVK was established in 1990 by the government in order to support the establishment and development of Hungarian SMEs. In 1990, the Commission of the European Union appointed MVA to implement PHARE’s SME Development Programme. HVKs were established under the MVA to serve as an implementation body operating in each county, totalling 140 to date. However, each HVK operates as an independent entityr, with the MVA supervising the programmes implemented by them and coordinating between the EU, the Hungarian government and HVKs. Since 1990 to the present day, the EU’s PHARE programme has seen to the promotion of SMEs, which meant over EUR 80 million financing, supplemented by the GKM as co-financier.20 The MVA manages the Micro Credit Programme (see details in Section 3.4.2), organizes enterprise development, consulting and training programmes, and other international programmes, such as businessmen’s meetings.

20

http://www.mva.hu/z_alapitv/a_tortenet.html - 2 November 2003, 14:54

24


Regional Development Holding Company (RFH) and Regional Development Companies (RFTs) The RFH was established in April 2000, with a working capital of HUF 500 million, to promote the development of enterprises and regions, the enhance employment and strengthen both inter-company and cross-border economic relationships. The RFT was originally established as an affiliate of the Hungarian Development Bank. Between 2000 and 2002 RFH participated in the development programmes of the Széchenyi Plan, as a key organization with executing tasks and managing calls for proposals. In 2002, when RFH’s subscribed capital was increased to HUF 8.5 billion, RFH purchased the RFTs and established additional companies involved in regional and entrepreneurial development. Since 2002 the main objective is to create an EU-compliant organization that is involved in regional and small area development and is in line with the EU funding mechanisms. Such an organization is capable of receiving EU development funds. Hungarian Investment and Trade Development Agency (ITDH) and Euro Info Centre (EIC) The ITDH was established in 1993 as a background organization of the GKM and the Ministry of Foreign Affairs, under the support of the PHARE programme. Its activities focus on investment promotion and trade development, including primarily improvement of export capabilities, increase of international competitiveness and subcontracting potential of Hungarian SMEs, as well as preparation of the Hungarian corporate sector for accession to the European Union. Euro Info Centre, operated within the framework of ITDH, has been designed to assist SMEs in their preparation for the accession to the EU, and to mediate the enterprise policy of the EU for Hungarian SMEs through consultation, seminars, information stands, publications and business partner exchange. For details, see Chapter 5. Hungarian Chamber of Commerce and Industry (MKIK) The MKIK, with a long history behind, is now a special entity established under the law. In the past, all enterprises have been required to register with the MKIK, but mandatory registration was abolished in November 2000.

25


The government provides financial support for the implementation of MKIK’s priority tasks, such as accelerate the development of SMEs, prepare them for EU accession and further improve Chamber services. The organization helps to mediate and popularize the objectives of the enterprise promotion programmes, and to acquaint entrepreneurs with the announced tenders. MKIK also elaborates ethical rules on decent market conduct with the involvement of economic interest representation groups. It co-ordinates the provision of economic information and the promotion work of the regional chambers that operate in the capital, both at the county seats (19) and in three other cities. At present the economic chambers have more than 45,000 voluntary members.21

Interest representation organizations of enterprises play a crucial role in shaping the business environment. They participate in the activities of the National Interest Conciliation Council, the Enterprise Promotion Council and other councils of national competence. These organisations present to the government economic policy proposals aiming to affect the group represented by them; they co-operate in working out the laws, communicate the views of entrepreneurs and negotiate with the government in their interest. The most important of these organisations are the following: National Association of Craftsmen’s Corporation (IPOSZ) Hungarian Industrial Association (OKISZ) National Association of Entrepreneurs and Employers (VOSZ) Confederation of Hungarian Employers and Industrialists (MGYOSZ) National Association of General Consumer Co-operatives (ÁFEOSZ) National Federation of Traders and Caterers (KISOSZ)

3.2 Historical Background In the late 1980s, when the economy has stagnated and the needs for economic liberalization have risen significantly, the government decided to launch drastic reforms in May 1988 by stepping up the ongoing initiative to move toward a market economy and transform the entire economic structure. The legal system was subordinated to supporting reforms, including the taxation system, the introduction of a new pricing mechanism and the

21

http://www.mkik.hu/ - 5 October 2003, 22:03

26


amendment of the Foreign Investment Act, followed by the Company Act of 1989 - to liberalize the foundation of private firms and the privatisation of state enterprises. Then the new administration, born out of the 1990 general election, embarked on extensive economic reforms toward a full market economy. As a result, SMEs of varying size and nature have emerged. In the 1990s, the need arose for SMEs promotion, so as to absorb the people who have lost their jobs as a result of the structural reform of the industry. Various laws and programmes were introduced to lay the foundations of fostering SME development. Nevertheless, the reforms are not considered a full-fledged SME promotion policy and programme. Here is a list of SME policies and programmes implemented in the 1990s, along with the established organizations: 1989 Enactment of the Company Act 1990 Enactment of the Solo Proprietorship Act 1990 Establishment of the Institute for Small Business Development 1990 Establishment of the Hungarian Small Business Association 1990 Establishment of the Hungarian Foundation for Enterprise Promotion (MVA) 1994 Issuance of Government Decree 2040/1994. on the Government Conception of the Development of Small and Medium-Sized Enterprises 1995 Establishment of Enterprise Development Council (VT) 1997 Establishment of the Small Enterprise Department in the Ministry of Industry, Trade and Tourism – it was later reorganized to the SME Promotion Department of the Ministry of Economic Affairs. It was the first administrative body responsible for SME policy. 1998 Formulation of the Hungarian Government’s Strategy for Supporting Small and Medium-Sized Enterprises – the strategy sets forth the following 9 policy agendas for SME promotion toward 2000. 1) Improvement of the business environment; 2) Expansion of financial access; 3) Strengthening of innovation capabilities; 4) Development of business information systems; 5) Creation of the entrepreneurship culture; 6) Preparation for the EU integration; 27


7) Upgrading of institutions and systems; 8) Enactment of the SME Promotion Act; 9) Coordination of SME support programs. 1998 Formulation of the Subcontracting Program – designed to foster SME domestic parts suppliers, promote their productivity improvement and activate growth of the supplier base. 1999 Enactment of the Act on the Development of Small and Medium-Sized Enterprises and the Promotion of Their Development (entered into force in January 2000)22 The SME promotion act has been drafted and discussed by the VT. The bill was submitted to the parliament in October 1997, but it was not passed until November 1999, partly due to the change of government. The act sets forth the basic principles on SME promotion. It consists of 4 chapters and 19 articles, including the definition of SMEs and budgetary allocation, as well as the fields and forms of support. The VT was re-codified: its role, operating procedures, organizational structure and members were determined. The Act also emphasizes that in the long term Hungarian enterprises need to catch up with the demands of the European Union. The Act established the SME Budget Appropriation (KKC) stressing that it is not their only available option for support, and other legislations may also grant access to tax and contribution benefits.23 The Ministry of Economic Affairs became responsible for managing the appropriation. SME promotion policies and programmes in Hungary were developed to a structured and systematic form in 2000. They are strongly affected by the EU industrial policy guidelines.

3.3 Széchenyi Plan On March 29, 2000, a medium-term development plan - the so-called Széchenyi Plan - was announced by the previous government for the period of 2001-2006. The priorities of the plan matched closely the development plans prepared to receive resources available under the Structural Funds of the European Union. The seven priorities set in the Plan were as follows: motorway construction; research, development and innovation; housing construction, travel development, supplier programme, SME development and regional economic development. The Plan projected a total of HUF 434 billion for 2001-2002 to 22

Zoltán Román: A kis- és középvállalatok az EU-csatlakozás tükrében (The SMEs and the EU Accession in Hungary). Európai Tükör 51., Miniszterelnöki Hivatal Integrációs Stratégiai Munkacsoport, 1999, p. 83-90 23 Act XCV of 1999 on the Small and Medium Sized Enterprises and the Promotion of Their Development

28


realize these priorities, of which a chunk of HUF 25 billion was earmarked for the purpose of SME promotion and HUF 18 billion was set aside for the supplier programme. The objective of the Enterprise Development Programme was to enhance competitiveness, harmonize direct and indirect forms of subsidy, expand the financing options of SMEs, support their non-productive functions and improve their operating conditions. This programme was based on sub-programmes, which were designed to facilitate and accelerate the reduction of duality in the Hungarian economy (i.e. the economic disparity between giant international companies and Hungarian SMEs), thereby further moving towards an economic development model relying on innovation, skilled labour and the involvement of capital. The Plan started on 1 January 2001 with the approval of the Budget Act. Most state support under the Széchenyi Plan was provided as non-repayable subsidy on either the capital or the interest rate, and one-off non-repayable subsidies for the following most important applications: •

change of business premises necessitated by change in legal regulation,

•

preparation for accession to the European Union,

•

interest subsidy to promote the purchase of family doctor’s operating license or the provision of health care public service,

•

expansion of commercial accommodation facilities and the conditions of related catering,

•

interest subsidy to promote developments by SMEs,

•

competitive investments,

•

establishment of European regional company centres,

•

introduction of quality and environmental management systems and their certification,

•

development of the motor vehicle pool of SMEs active in domestic public road transport service,

•

procurement of technical equipment, machinery resulting in the technical modernization of SMEs,

•

micro credit interest subsidy,

•

extension, renewal, modernization of independent retail outlets, catering places and service points for the population operated by SMEs,

•

technology shift motivated by environmental protection.

29


According to the balance on subsidies provided by the Széchenyi Plan a total of HUF 70 billion was granted to SMEs, with 5300 SMEs benefiting from tender funds. 24 The Plan has evoked much criticism for being discriminatory by choosing the fields of development. On the other hand, those sectors were chosen which were most capable of contributing to the development of the national economy. Since then such a sharp economic policy has not been carried out. In October 2001, the government adopted the Széchenyi Programme Plus, aimed at offsetting the effects of world recession on Hungary by an expansion of the housing scheme subsidies and the accelerating of the process of infrastructural investments. In order to moderate the tax burdens of SMEs, two significant benefit schemes were introduced in 2001. One is the investment tax base benefit of micro and small enterprises, allowing to reduce profit before taxation under specific conditions. The second is the tax relief on credit interest to SMEs, allowing them to deduct from the tax 40% of interest paid on credit drawn for the purpose of purchasing fixed assets. After the 2002 parliamentary elections, the Ministry of Economic Affairs - responsible for SME promotion - was reorganized by the new government. It took over the transport-related functions of the former Ministry of Transport and Water Management and became the Ministry of Economy and Transport on 22 May 2002. In August 2002, the government announced the freezing of a large part of the Széchenyi Plan programmes, stating that it was too complicated and difficult to review. The Széchenyi Plan will be revised to concentrate the funds on SME development and EU pre-accession projects, and will be integrated into the National Development Plan by 2004 (see Section 3.6 for details).

24

State of Small and Medium Sized Business in Hungary Annual Report 2002. Hungarian Institute for Economic Analysis, 2002, p. 187-194

30


3.4. Széchenyi Enterprise Promotion Programme In order to eliminate the negative features of the Széchenyi Plan and to apply wider array of subsidy instruments, the government announced its SME promotion document at the end of 2002, called Széchenyi Enterprise Promotion Programme (SZVP). The SZVP is a mediumterm SME development concept (covering the period of 2003-2006) adhering to the requirements of the European Charter for Small Enterprises. Unlike the Széchenyi Plan, which focuses on non-repayable subsidies, the SZVP offers a large scale of assistance instruments. Besides the non-repayable subsidies it provides new loan-, guarantee-, and capital investment schemes. Its objectives are: •

to promote the further development of SMEs showing a capacity for growth and their spread on the domestic and external markets,

•

to provide economic policy support for stagnating but viable SMEs to allow them to hold on and operate on the Single Market of the EU, and

•

to provide assistance to SMEs in a disadvantageous position or located in a deprived region to ensure their equal opportunities.25

3.4.1. Main Pillars of SZVP Predictability The government provides a predictable, stable environment in the long term for enterprises by gradually diminishing the tax and administrative burdens. The help SMEs and encourage start-up enterprises, the Ministry of Finance prepared a simplified tax system, and launched it in January 2003. The so-called “Simplified Enterprise Tax” (EVA) replaced VAT and the Enterprise Tax for Limited Partnerships and Private Limited Liability Companies, and was made available for enterprises that have been operational for at least 2 years, with a turnover less than HUF 15 million In addition to the successful capital investment tax base allowance approved in 2001, the socalled development reserve was also introduced in 2003. This allowed the investment of profits generated in the year before, free of taxation. 25

Széchenyi Vállalkozásfejlesztési Program (Széchenyi Enterprise Promotion Programme), Ministry of Economy and Transport 2002, p. 4

31


The health contribution rate was also reduced by 23%. Equal Opportunities The Programme provides higher subsidy rates to encourage development in the more backward regions where unutilised labour is high, and to decentralize the assistance procedures offered for disadvantaged regions. Publicly-financed special educational programmes are designed for the enterprises of the socially disadvantaged groups. The government supports enterprises that do not dispose of their equities in order to modernize technology by promoting access to capital market services via state venture capital societies, such as the Small Enterprise Development Financial Company (Kisvállalkozás-fejlesztő Pénzügyi Rt.), the Subcontracting Investment Co. (Beszállítói Befektetői Rt.), Corvinus Co., and some regional development companies. The government deems it important to support the SME investments of venture capital societies as well as to encourage supplier activities and trans-border investment. Accelerating Adaptation Besides improving competitiveness the government puts a strong emphasis on preparing SMEs for EU accession, because then they will be exposed to the operational conditions of the Single Market. The programme dubbed “EU comes to your doorstep” was launched in 2003. Under this programme, technical presentations will be held in every micro-region of Hungary on general topics, as well as on issues of particular relevance for the micro-region concerned, to assist the preparation of local undertakings. 3.4.2. Financing The Programme intends to create a transparent credit programme relying on past experiences and achievements. The acquisition of financing is assisted by a multi-stage system in which different credits are available in terms of amount borrowed, as well as the tenor and the extent of tax subsidies, to meet the demands of various enterprise groups. Stage 1: (Phare) Micro Credit Programme This programme was launched in 1992 with support from the PHARE programme and was financed only by the European Union in the first phase. The joint financing scheme is in

32


place since 1996, which is managed by the network of the Hungarian Foundation of Enterprise Promotion (MVA), and consists of approximately 20 local enterprise agencies. The general objectives of the programme are as follows: •

to extend financial and business support to micro enterprises and start-ups, taking their special needs in consideration,

•

to ensure that these enterprises become potential credit-worthy clients of commercial banks.

Within the programme, micro-enterprises, not capable of accessing funds on the financial market either because of their history or the size of the project concerned, are eligible for a maximum of HUF 3 million funding. The instrument offers loans to finance machines, equipment, assets and other capital expenditure projects to expand existing business property or hired infrastructure, and current assets. This year, until 28 October, 762 enterprises have received micro credit to a total amount of around HUF 2.9 billion.26 Stage 2: Széchenyi Card The National Association of Entrepreneurs and Employers (VOSZ) joined the MKIK and the GKM, to develop Hungary's credit opportunities with the Széchenyi Card. The programme is effective since 28 August 2002, enabling enterprises to take out current-asset loans of up to HUF 5 million a year through a less complex and less time-consuming process. As of 1 July 2003 cards, in values of HUF 2, 3, 4, and 5 million, were made available. The interest rate subsidy is 5% for HUF 500 thousand and HUF 1 million, while it is 3.5% for cards that offer higher credit lines. In 2004 the subsidy will be a uniform 3%. Under this programme about 6,500 SMEs requested cards so far, and an aggregate credit of HUF 11 billion has been granted. Stage 3: Medium-Size Loan (Midi Loan) This programme is the most recentof all the initiatives. It started off on 15 October 2003 and within its framework SMEs may claim long-term development loans of up to HUF 10 million. To make these medium-size loans offered by financial institutions more accessible to enterprises, the GKM provides a 4% interest subsidy. The loan is offered to finance development initiatives, such as machines, equipment, modernization of premises. 26

http://www.fn.hu/cikk.php?id=3&cid=69104 - 21 November 2003, 15:36

33


Stage 4: Európa Loan The objective of the Europe Technological Development Investment Loan Program - started this March - is to provide long-term financing for the investments of SMEs and large Hungarian enterprises aiming at modernize or develop technology in order to meet Internal Market conditions and increase their competitiveness. The programme is part of the Europe Plan, introduced earlier this year. The scheme offers SMEs loans of between HUF 10-500 million for a tenor of maximum 15 years. For the financing of the facility, the Hungarian Development Bank (MFB) provided a credit facility of HUF 80 billion to the SME sector, backed by a government exchange rate guarantee. Until 28 October, 2003, 245 credit requests have been accepted for a total amount of HUF 11.4 billion.27 3.5. ‘Smart Hungary’ Investment Promotion Programme In addition to the SZVP, other application schemes managed by the GKM are also available to SMEs. However, experiences indicate that these schemes are chiefly appropriate for medium-sized and larger undertakings. Smart Hungary, the medium-term investment stimulation concept of the government has been construed to make Hungary the most competitive European business location for investments. The programme aims to stimulate FDI that will help to modernize the business structure, enhance the employment ability and income generating capacity of Hungary. It strives to satisfy investors’ information needs, provide assistance to sound business decisions and supervise the efficient and transparent use of public funds for subsidies. Assistance is provided by tax-related and direct incentives aimed at explicitly defined goals, such as: •

to incentivise companies already established in Hungary to continue domestic operations and arouse their interest in further investments,

•

to foster profit reinvestment for development purposes,

•

to accelerate the growth of manufacturing investments and increase the ratio of strategic services,

27

http://www.gkm.hu/dokk/main/gkmeng/sme/sme_policy/szechenyienterprisedevelopmentprogramme.html 15 October 2003, 19:44

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•

to promote Hungary’s regional role by giving impetus to the establishment of regional corporate management centres,

•

to strengthen the capital-attracting potential of underdeveloped regions in order to diminish regional disparities,

•

to drive the utilization of R&D and innovation skills in the entrepreneurial sector,

•

to increase reliance on Hungarian suppliers and contract manufacturers,

•

to accelerate the development process within enhanced awareness of environmental requirements.

3.6 National Development Plan Hungary joins the European Union on 1 May 2004. Subsequently it will qualify for its major support schemes - the Structural Funds and the Cohesion Fund -, which are the primary Community instruments for reducing the development disparities between Member States and regions in order to strengthen economic and social cohesion. Pursuant to Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds, eligible countries are expected to prepare their development objectives and priorities, in the framework of National Development Plans and submit them to the European Commission. The National Development Plan (NDP) will form the basis for discussions with the Commission, as a result of which the Community prepares the Community Support Framework (CSF), representing the legal framework for payments from the Funds. The CSF contains the financial commitments of the EU and Hungary allocated on certain development fields, co-financed from the Structural Funds between 2004 and 2006.28 According to mandatory regulations and informal guidelines of the European Commission, the NDP includes the following: •

Ex-ante evaluation (assessment of the feasibility and expected impacts of the programmes before their actual implementation)

•

Situation analysis

•

SWOT analysis

•

Development strategy and objectives

•

Coherence and consistence of the strategy

35


•

Financial tables

•

Brief description of the operational programmes

•

Institutional structure for the implementation

•

Document on Partnership29

3.6.1 The Planning Process The elaboration of the Hungarian NDP began in February 2001. Until the change of government in May 2002 the Situation Analysis Chapter of the NDP was completed. When Chapter No.21 on “Regional Policy” was closed, the newly elected government confirmed its predecessor’s obligation and approved the NDP by the end of 2002. In the summer of 2002 the Situation Analysis was revised, mainly in light of the comments from the European Commission. The elaboration of the NDP Strategy began simultaneously. In mid October the government approved the first draft of the Operational Programmes (OP) and social consultations began with regard to the OPs. The Strategy and the OPs were revised on the basis of such consultations and the informal comments sent by the Brussels Commission. In mid December last year the government approved the second draft of the entire NDP document along with the Ops, stipulating that the NDP had to be submitted to the European Commission by the end of March 2003. As a result of discussions with relevant Commission members in March 2003, and after the integration of the results of the first phase of ex-ante evaluation, the government agreed to submit the OPs to the Commission by the end of April. Prior to the government approval both the NDP and the OPs were discussed by councils at the national level (National Interest Conciliation Council, National Regional Development Council, National Environmental Protection Council), and also by regional partners. After the submission of the NDP and OPs came their ex-ante evaluation, with simultaneous discussions with the Commission. The Programme Complements were submitted to the European Commission at the end of September 2003.30

28

Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds 29 http://www.om.hu/e_cikk.ivy?artid=64825ee3-8331-4c85-89c5-1b3df6f26bb9&colid=51e52443-be654477-9fdc-1fd541af3fdd - 15 November 2003, 16:00 30 http://www.eiro.eurofound.ie/print/2003/06/feature/hu0306103f.html - 3 October 2003, 23:15

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3.6.2 NDP Framework The Plan is in line with the programming guidelines of the European Commission between 2000 and 2006 (The Structural Funds and their co-ordination with the Cohesion Fund, Guidelines for programmes in the period 2000-2006), which provide the basis of development policies that promote better employment and the improvement of economic competitiveness. In addition, the guidelines also take into account the relevant Community policies, as well as the national policies and strategies. In addition to all this, the NDP also relied on Hungary’s Medium-Term Economic Programme; a document for the period 2001-2004, which involves longer impacts. The objective of the medium-term economic policy is modernization, realignment to European standards by a somewhat stronger competitiveness, striving for financial and price stability and effective cohesion between the economy and the society. The Hungarian NDP relies on the resources of all Structural Funds (European Regional Development Fund, European Social Fund, European Agricultural Guidance and Guarantee Fund, Financial Instrument for Fisheries Guidance). Consequently, its objectives and priorities must be in line with the regulations of the European Parliament and Council, which govern the allocation of these funds. The interventions financed by the Structural Funds are closely connected with the measures financed from the Cohesion Fund at the same time. The development objectives of the Cohesion Fund are reflected in the NDP and are in compliance with Council Regulations (EC) No 1264/1999 and 1265/1999 on the Cohesion Fund. 3.6.3 Components of NDP The Situation Analysis of the Plan describes the conditions of the Hungarian economy and society, points out the key issues and explores the root-cause of problems. The SWOT analysis highlights Hungary’s strengths and weaknesses, opportunities and threats. The long-term objective of the NDP has been defined on the basis of the analysis, i.e. to improve the national standard of living in general in general and, regarding the given finance period, increase the personal income potential, which currently lags behind the EU average. There are three specific objectives supporting this main objective: improvement of economic competitiveness, better utilisation of human resources and promotion of a better quality environment and regional development.

37


The NDP intends to achieve the specific goals through four development priorities: a more competitive manufacturing sector, higher employment rates and better human resources, a more developed infrastructure and a cleaner environment, and a stronger regional and local potential. (See Appendix 2) The measures defined in order to achieve the above goals are implemented in the framework of 5 Operational Programmes. The Economic Competitiveness Development Operational Programme (ECOP) intends to improve the general competitiveness of the economy by supporting investments aimed at modernization in the manufacturing sector. It will increase social cohesion and employment through technical modernization of SMEs and support their innovation networking activities, as well as passing on up-to-date management skills. It will promote economic innovation by bolstering competitive research in the Hungarian R+D sector financed publicly and privately, as well as strengthening relations between the R+D sector and the economy. Another objective of the OP is to support the development of an electronic economy concerning infrastructure and digital content, as well as electronic administration. The objective of the Human Resource Development Operational Programme (HRDOP) is to increase the rate of employment and improve the competitiveness of the workforce by providing qualifications in line with the demand of the labour market and promoting social integration. The priorities of the OP include support to active labour market policies, development of training and education as part of the life-long learning policy, improvement of adjusting capabilities and entrepreneurial skills, as well as development of health, educational and social infrastructure related to human resource development. In line with the development financed from the Cohesion Fund, the Environmental Protection and Infrastructure Operational Programme (EIOP) has set an objective to improve the environmental conditions of the country by establishing environmental infrastructure, increasing environmental safety, and investing into nature conservation. The programme also aims at investing into the improvement of transport infrastructure by building motorways and bypass roads around large cities.

38


As the title suggests, the goal of the Agricultural and Rural Development Operational Programme (ARDOP) is to achieve a more efficient agricultural production by developing production technologies and product processing (especially that of food). Other aspects of the programme include realignment of rural areas, finding alternative sources of income for the rural population, developing rural infrastructure and services, and protecting the rural cultural heritage. Part of rural development measures are expected to be financed from the national budget. The Operational Programme for Regional Development (OPRD)

aims to improve

economically and socially underdeveloped areas and parts of settlements within regions. The OP intends to promote this development by improving the economic environment, supporting educational infrastructure that assist tourism and economic development, developing regional infrastructure and rehabilitating settlements. It also plans to improve the settlement’s environmental management activities, increase both the human resource supplies and the knowledge base of regions, and modernize public administration procedures in general.31 3.6.4 Promotion of Enterprises and Investments The improvement of the competitiveness of the manufacturing sector is among the specific objectives of the NDP. In order to implement them the ECOP lays special emphasis on investment promotion to attract more capital, plans to update the entrepreneurial sector and improve its infrastructure conditions. To attract more capital the ECOP has employed a number of measures to support additional capital involvement necessary for the structural modernization and the growth of the Hungarian economy. The measures include working capital and green field investments, as well as the updating of existing capacities. This constitutes the introduction of up-to-date manufacturing and service technologies; support of more active participation in international division of labour; promotion of inter-company co-operation and the development of the supply industry; support of environmental protection improvements in the interest of sustainable development innovation, research, development and technological transfer.

31

http://www.nfh.hu/ - 3 October 2003, 23:12

39


The ECOP contributes considerably to the development of SMEs, both as regards the modernization

of

their

technical-technological

background,

the

propagation

of

entrepreneurial culture and know-how. In addition, the ECOP helps to widen the cooperation of the entrepreneurial sector, increase the level of research and development, promote innovation and create the economic development necessary for the so-called information society (e-economy, e-commerce, e-public administration). The Human Resource Development Operational Programme (HRDOP) aims to develop flexibility and entrepreneurial abilities, provides skilled trainings to create further jobs and enhance entrepreneurial power, including specialized education programmes for adults, too. By this it contributes considerably both to the increase of capital attraction and the improvement of the competitiveness of the Hungarian small- and medium-sized entrepreneurial sector. The Agricultural and Rural Development Operational Programme (ARDOP) considers competitive agricultural raw-material production a primary focus. Therefore it helps the young farmers, supports agricultural investments and professional (re-)trainings, and promotes the modernization of food processing, respectively. In addition, it lays special emphasis on the improvement of rural regions, - including higher personal income potentials, the development of infrastructure and rural reconstruction, inter alia. One of the goals of the OP for Regional Development (OPRD) is to improve the renewing ability of society, especially the flexibility of enterprises and employees. The programme devotes distinguished attention to the development of the regional economic environments and the reception capacity of tourism. It also foregrounds projects of integrated regional and settlement development, leading to the re-utilization fo the brown-field region. The Environmental Protection and Infrastructure Operational Programme (EIOP) emphasises environmental protection, particularly the spread of environment-friendly energy management, the development of transport infrastructure, the improvement of accessibility, and the modernization of the telecommunications infrastructure, including the spread of a wide-range of telecommunication infrastructure to the more developed regions.

3.7 Public Procurement in Hungary 40


“Public Procurement is the term used to describe the purchasing of works, supplies and services by national, regional and local public bodies, including central government, local authorities, fire and police authorities, defence, health services, joint consortia of public bodies, and public and private utilities.”32 The public procurement process in Hungary is regulated by the Act XL of 1995 on Public Procurement, which came into force on 1 November 1995. The act was introduced to make the utilisation of government funds more transparent and efficient, by enhancing competition. The Act is in harmony with the legal regulations used in the EU. The Act ensures equal chances for all bidders and disqualifies enterprises that are 1) subject to bankruptcy or liquidation proceedings, 2) have public debts overdue by more than a year, or 3) breached the law in the past 5 years. According to the Act a public procurement procedure may be: •

open, in the course of which all interested parties may make offers;

•

restricted, in which only those invited may present their offers;

•

and negotiated, in which the tender announcer can negotiate the contract terms and conditions freely with pre-selected bidders.

The Act established the Council for Public Procurement as the organisation responsible for monitoring the contracts. The Council must report its observations each year to the Parliament, concerning the fairness and transparency of the processes.33 According to data provided by the Council for Public Procurment, 4243 public procurement processes were conducted for a total amount of HUF 804.6 billion in 2002. SMEs won 2788 public procurement tenders (65.7% of all), for a total amount of HUF 376.5 billion, which is 46.8% of the total amount. The figures indicate that SMEs numerically play a large role in the processes, but percentage-wise they have won the smaller amounts. Figure 3.1: Public Procurements Won by SMEs by Number, 2002

32 33

http://www.publictender.co.uk/eu-procurement.html - 25 October 2003, 16:49 Act XL of 1995 on Public Procurement

41


100% 80%

1153

12

2 279

28

481

open

invitation-based

negotiation-based

290

60% 40%

Large SME

20% 0%

Type of procedure

Figure 3.2: Public Procurements Won by SMEs by Value, 2002 100% 80% 60%

Large SME

40% 20% 0% open

invitation-based

negotiation-based

Type of procedure

Some of the disadvantages of SMEs are natural and inevitable since they arise from the size of the potential supplier companies (lower capital and liquidity, small administrative staff, fewer references, weaker performance guarantees, etc.). The 40% share from the value of open tenders in Hungary is, however, rather low, compared to the fact, that 99.9% of enterprises are SMEs. This result is the consequence of unequal chances. First of all, the process of obtaining the certificate necessary for bidding is too difficult and expensive and thus many SMEs draw back already at the beginning of the procedure. Nor can they understand and apply the provisions of the Public Procurement Act, and most of them cannot afford to employ professionals for this task. Another problem is that the value-limit of public procurement procedures is rather high, so the bids are less accessible to SMEs. Corruption and the fear of it is yet another problem. The media is full of corruptionsuspicious cases in public procurement and state investments processes. Tenders are often

42


won by “government-close” organisations and thus entrepreneurs may think that they have no chance to win a public procurement tender anyway. One solution for these problems may be that the government reserves a certain quota of the public procurement procedures for SMEs or enterprises which guarantee the participation of SMEs as their sub-contractors and suppliers. It would be also necessary to organize and implement training- and development programmes for SMEs, which would help them understand the legal background necessary to complete a tender and the relevant marketing jobs. SMEs that cannot afford the run on tenders by themselves should submit their bids in consortiums, so that they have increased chances of winning.

4. EU Support for SMEs 4.1 Pre-Accession Assistance for SMEs As well as the other prospective member states, Hungary also has access to the preaccession funding of the Community budget, designed to prepare the candidates for membership. Three programmes have been created to promote the development of these countries in different fields. Rural areas and agriculture are the main targets of means from SAPARD (the Support for Pre-Accession Measures for Agriculture and Rural Development Programme) introduced in 2000. The objective of ISPA (the Instrument for Structural Policies for Pre-Accession) is to prepare the candidate countries for EU membership in the field of infrastructure, environmental protection and transport. The PHARE programme was the first among all, originally created to support the economic transformation of Hungary and Poland under the name “Poland and Hungary Assistance for the Reconstruction of the Economy”. The programme currently supports institution building and the development of administrative capacity in the candidate countries, as well as some development projects. It is therefore the most important in the promotion of SMEs. PHARE assistance to SMEs in the candidate countries has been delivered through a wide range of programmes. The PHARE Country Programmes have supported economic development and restructuring, the improvement of SMEs, agriculture and infrastructure. In 1990, the Commission appointed the MVA to implement the SME promotion programmes.

43


The MVA commenced financing programmes, such as the micro credit programme (see details in Section 3.4) and support programme of sport enterprises.34 Two more programmes are running under PHARE at the moment. The first, which started in 2001, is aimed at promoting competitiveness of SMEs, and at increasing productivity and employment of the sector. In the narrow sense, its objective is to promote co-operation between SMEs and to improve their market opportunities, as well as to increase their supplier potentials. The deadline for application was in October 2001, and applications were evaluated by the first half of 2002. The EUR 11 million support has been distributed between 92 SMEs in the form of non-repayable subsidies. The project called “Improvement of Human Resources of SMEs” is co-financed by the Hungarian government and managed by the International Training Centre For Bankers in the form of trainings. It aims to increase their competitiveness and business performance by means of improving their human resources.35 The SME Financial Facility –commenced in April 1999, is designed to encourage the growth and development of SMEs by facilitating access to loans, leasing and equity operation with various local financial institutions in the prospective member states. The Facility is co-managed with the European Bank for Reconstruction and Development (EBRD), the Council of Europe Development Bank in association with the German Kreditanstalt für Wiederaufbau (KfW), and the European Investment Bank (EIB). It is an indirect subsidy provided through commercial banks of the candidate countries.

4.2 EU’s SME Policy and Hungary 4.2.1 Historical Background The EU has highly recognized the importance of SMEs in the promotion of economic growth and in the security of employment, and has therefore created action programs for supporting SMEs. The Third Multiannual Programme for SMEs in the European Union (1997-2000) was created in 1996 in order to harmonize SME policies among member nations and to provide a more efficient SME support. The total expenditure of the

34

Balázs Forman: Az Európai Unió strukturális és előcsatlakozási alapjai (The EU’s Structural- and PreAccession Funds), Interpress, 2003, p. 165-168 35 http://www.kkvhelp.hu/programismerteto.htm - 20 November 2003, 13:33

44


programme was ECU 180 million. It also served as a guideline for Hungary since the signing of the Association Agreement in December 1991. This programme is centered on the improvement of business environment of SMEs and on the strengthening of competitive power and technological capabilities. The essential features of this programme are summarized in the six points below: 1. To simplify and improve the administrative and regulatory business environment (Business Environment Simplification Task Force – BEST). 2. To improve the financial environment for enterprises (improvement of access to financing and risk capital finance, reduction of the issue of delay in payment, development of capital market, etc.). 3. To help SMEs to Europeanise and internationalise their strategies, in particular via better information services (Euro Info Centres, business search networks, partnership programme Interprise, etc.). 4. To enhance SME competitiveness and improve access to research, innovation and training. 5. To promote entrepreneurship and support special target groups. 6. To improve SME policy instruments. Hungary was allowed to take part partially in some of the programmes from December 1998 (e.g. Europartenariat, Interprise, Euro Info Centres, IBEX). However, Hungarian SMEs had limited access to opportunities offered by the programmes. The most important result was the expansion of the organisation system of EICs.36 In June 2000 the General Affairs Coucil adopted the European Charter for Small Enterprises. This was welcomed by the Feira European Council, on 19-20 June. The European Charter for Small Enterprises was the first to identify the major areas for action in order to meet the target confirmed by the conclusions of the Lisbon European Council in March 2000, which committed the EU to becoming the “most competitive and dynamic knowledge-based economy in the world” by the end of the decade. The ten lines of action indicated in the Charter are the following: •

education and training for entrepreneurship,

•

cheaper and faster start-up,

36

Kis vállalkozások – nagy lehetőségek, avagy az Európai Unió vállalkozásfejlesztési politikája (Small Enterprises – Great Opportunities, SME Policy of the EU). Magyar Köztársaság Külügyminisztériuma, Budapest, 2002, p. 6

45


•

better legislation and regulation,

•

availability of skills,

•

improving online success,

•

more out of the Single Market,

•

taxation and financial matters,

•

strengthen the technological capacity of small enterprises.37

As the key to small-enterprise assistance and development activities, the Charter is the basic document of enterprise development in the European Union. At the end of April 2002, at Maribor, Slovenia, Hungary signed the Charter together with the other candidate countries. By signing it, Hungary committed itself to shaping its policy in line with the actions specified there. 4.2.2 Multiannual Programme for Enterprise and Entrepreneurship (2001-2005) The Council of the European Union adopted a decision on 20 December 2000 (Council Decision 2000/819/EC), to launche its Multiannual Programme for Enterprise and Entrepreneurship, and in Particular for Small and Medium-Sized Enterprises (2001-2005). This programme has a total budget of EUR 450 million, most of which (EUR 317 million) goes to the financial instruments. The rest finances the operation of the Euro Info Centres (almost 300 across Europe) and the formulation, testing, and benchmarking of enterprise policy ideas. The objectives of the programme are: •

to enhance growth and the competitiveness of business in a knowledge-based economy,

•

to promote entrepreneurship,

•

to simplify and improve the administrative and regulatory environment for business, in particular to promote research and innovation,

•

to improve the financial environment for business, especially SMEs,

•

to give business easier access to Community support services, programmes and networks and improve the coordination of these facilities.

37

Enlargement – What can Enterprises in the New Member States Expect? Enterprise Publications, European Commission, 2003, p. 10

46


Three instruments have been created in order to realize the above objectives: 1. The Euro Info Centres Network represents an interface between European institutions and local actors. Its task is to inform, consult and assist SMEs in all development phases, drawing on EU expertise. EICs also provide vital feedback to the EU on the problems and difficulties faced by SMEs. 2. Financial instruments with the aim of helping to bridge some of the gaps or failures in capital markets for start-up companies and SMEs. These initiatives are managed by the European Investment Fund (EIF). •

Start-up Scheme of the European Technology Facility (ETF): supports the establishment and funding of start-up SMEs by providing risk capital to small-scale or newly established ventures, as well as capital funds and venture capital funds aimed to improve technology research centres and science parks.

•

Seed Capital Action: aims to stimulate the supply of capital for the creation of innovative new businesses with growth and job creation potential, including those in the traditional economy, via support for seed funds, incubators or similar organisations, from their first year of operation.

•

SME Guarantee Facility: provides co- or counter-guarantees to support European guarantee schemes operated by public or private sectors of member nations and to financial institutions. The target is mainly loans to SMEs of up to 100 employees.38

3. Best procedure for identification and exchange of best practice. The Best procedure responds to the European Council’s call for an open method of coordination. It provides a framework for projects supporting Member States’ efforts to identify and exchange best practice through benchmarking or other methods, stimulating continuous improvement in the business environment. Best projects represent political priorities as agreed with the Member States in the Enterprise Policy Group (EPG). Some statistical work, preparatory studies within the Best procedure, and some ground-work in prospective Best procedure projects are also included in this work programme. As of October 15, 2002, the MAP became available for Hungary as well. Nine of the expert working groups set up to implement the projects under the programme have members

47


delegated by Hungary already. Participation in this program gives Hungary access to the best experiences and achievements of Member States in the areas of supporting the development and competitiveness of SMEs in economies that use new technologies, benchmarking and the opportunities presented by the e-economy. In December 2001 the EIF accepted the Credit Risk and Venture Capital Guidelines, which apply equally to beneficiaries of EIF guarantees and venture capitals. It means that the EIF shall apply the same selection criteria for the evaluation of proposals, regardless of whether they come from the EU members, the EEA nations or any of the accession countries. Guarantee operations using resources from the European Community’s SME Guarantee Facility have not yet been signed in Hungary. Nor have been carried out venture capital operations under the ETF Start-up Facility or the Seed Capital Action due to the weakness of proposals mediated by Hungarian financial institutions. Unlike the above, the operation of the EIC Network in Hungary have been quite successful and beneficial by receiving the European Commission support, documents and data. The 9 EICs currently operating in Hungary proved to be very important in providing SMEs with vital information on the Internal Market. The application process for the extension of the EIC Network was launched in November 2002. Two applications have been won by Hungarians, thus 2 more Centres opened in Hungary on 1 November 2003.

4.3 Other Funding Opportunities There are other funding opportunities available for SMEs. These are not directly aimed at promoting enterprises in general, but to develop specific fields of Community policy. This is a short-list of them: •

LIFE III: the main tool of the EU’s environmental policy aiming at the development of innovative, integrated techniques and methods, as well as the future development of Community environment policy. Participation of SMEs is particularly encouraged.

38

European Union Support Programmes for SMEs, Enterprise Directorate General, European Commission, May 2003

48


•

Socrates: the European Community action programme in the field of education (2000-2006). SMEs can participate in certain actions under the Comenius, Erasmus, Grundtvig, Lingua and Minerva programmes.

•

Leonardo da Vinci: supports innovative transnational initiatives for promoting the knowledge, aptitudes and skills necessary for successful integration into working life and the full exercise of citizenship.

•

Intelligent Energy for Europe (2003-2006): provides financial support to local, regional and national initiatives in the fields of renewable energies, energy efficiency and energy aspects of transport.

•

Sixth Framework Programme for Research and Technological Development (2002-2006): promotes the development of research and innovation throughout Europe. Allocates over 15% of its total budget to support SMEs.

•

E-Content (2002-2005): supports the increased access, use and distribution of European digital content, and especially any innovative and viable content projects.39

4.4 Hungarian SMEs in EU Public Procurement Processes EU public procurement rules were introduced to ensure fair and open competition by and between EU member states for contracts of goods, services and construction projects. These rules affect tenders not only for central governments and local authorities, but also for public utilities, and the transportation and telecommunications industries. Public procurement in the EU represents more than EUR 720 billion annually, which amounts to about 11 % of the Union's GDP. The business community is notified of these tenders through the Official Journal of the European Communities, Supplement S, and its online version called TED (Tenders Electronic Database). The EC public procurement rules apply both to the 15 member states and the European Economic Area (EEA - Iceland, Norway and Liechtenstein), as well as countries covered by Europe Agreements (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia). Agreements have also been signed with Turkey, Morocco and Tunisia to develop competitive public procurement practices. Public procurements in the EU are based on the following important rules:

39

http://www.euoldal.hu/palyazatok.php - 25 October 2003, 19:25

49


•

all public procurement contracts exceeding certain threshold values must be published nation-wide,

•

discriminatory technical specifications may not be used to tailor contracts for a local or national supplier,

•

objective criteria must be used in tendering and contract award procedures.

Article 66 of the Association Agreement between Hungary and the European Union declares that Hungarian companies may participate in Community’s public procurements under a treatment no less favourable than that accorded to Community companies. The same Article, however, also declares that EU companies do not have the right to participate in Hungary’s public procurement processes for10 years. This restriction, however, will expire on 1 February 2004. In spite of this, multinationals from EU member states have been winning Hungarian public procurement processes for years via Hungarian subsidiaries. The number of Hungarian companies winning EU public procurement tenders is moderate. As regards their number, official statistics are not available. The BAU-DOK Foundation dealing with the acquisition of EU tender dossiers - reviews contract awards information in each issue of the Official Journal. According to these data in 1998 and 1999 nearly 200 companies obtained tender dossiers out of which 30 in 1998, and 40 in 1999 rendered a tender, and 2 eventually won. In 2000, the number of companies acquiring tender documentation decreased to 130 but the number of winning tenders increased to 10. In 2001 and 2002 the number of companies interested further decreased to 52 and 72, respectively. This indicates that many companies gave up after one try. In 2001 there was only one winning Hungarian company, although this number increased to 18 by the first half of 2002.

So what is the reason behind the small participation? The primary reason is the lack of information. SMEs frequently seem unaware of their right to participate. It is typical for Hungarian companies that they concentrate on the short-term, instead of trying to win competitive advantage in the long-run. For this reason, they do not seek information for existing opportunities on the EU market. The “I don’t have a chance” type of attitude is also a problem. If they do not try, they will definitely not succeed. The single experience of participation in an EU tender overweights the costs in question. The maximum loss possible is the price of the tender dossier, translation and posting, which is very low even for SMEs

50


with a small amount of capital. SMEs also generalize their bad experiences in tendering on the Hungarian market. Lack of language skills and knowledge on how to write good tenders creates additional barriers. Despite all of the above problems, SMEs must realise the opportunities offered by public procurements, even if they fail to win; they can gain a great amount of knowledge and experience about the Internal Market (market prices, product quality, requirements, etc.), which provides them with some competitive advantage before accession. It also gives the chance of getting to know companies operating in the EU, with whom we might build supplier-buyer relationships in the future.

51


5. Activities of ITDH Euro Info Centre 5.1 Hungarian Investment and Trade Development Agency With ITDH's involvement in 2002, foreign investors have made green-field investment decisions totalling EUR 302 million. Examples include foreign companies such as the American GE, the Japanese Sunarrow Ltd., the German Schmitz-Carogbuel AG and Provertha Electronic Components GmbH., the Brittish Lander Carlisle, and the Irish Duolog Technologies. Consequently, 5,861 new jobs were created. The agency successfully managed 48 projects. Between 1998 and 2002, ITDH participated in investment decisions totalling EUR 2.9 billion, creating 48,000 jobs. During the year 2002 ITDH has organised 370 events both in Hungary and abroad, of which 242 were focusing on trade development and 128 on investment promotion. These events were exhibitions, investment and trade promotion seminars, businessmen’s meetings and targeted searches for partners. In 2002, 129 exhibitions and ITDH information stands were organised abroad. Over 1,600 enterprises participated in these events. The most outstanding was the Moscow National Exhibition in September, in which 97 Hungarian exhibitors participated on 1,500 m2. ITDH handles the trade promotion tender of the Ministry of Foreign Affairs year by year, which means an average of 450-500 applications yearly. The company also organised visits abroad, where businessmen were accompanied by government delegations. These visits were extremely successful. On such occassions the businessmen had the opportunity to meet potential partners, and conducted trade negotiations. With the help of these events 1290 Hungarian companies launched their products on the foreign market. Representatives of 2520 Hungarian SMEs participating in ITDH’s trade development seminars received information on applications eligible for state subsidy within the framework of the Economic Development Target Appropriation and Trade Development Target Appropriation. Several presentations were held, introducing the Hungarian investment climate and businessmen’s meetings, coupled to the visit of foreign delegations. Last year ITDH continued the promotion of the working capital export of Hungarian companies as one of its most important tasks. To this end, it organised events that introduced investment and privatisation opportunities in the neighbouring regions.

52


The programmes held in 2002 cost a total of HUF 1,127 million, and were financed from the state budget’s Economic Promotion Target Appropriation.

5.2 Euro Info Centre (EIC) Network The EIC network was established in 1987 under the aegis of the European Commission. At present the network is comprised of 265 EICs in 46 countries including the candidate countries (13), the EU’s most remote regions, and the European Economic Area. In addition, the EIC network has 30 Associate Members, 13 Euro Info Correspondence Centres (EICCs) and 340 relay points, which significantly extend its geographical coverage. The network was specifically created to help businesses take advantage of the opportunities that the EU offers. The following four missions have been drawn up to ensure this objective: •

Inform enterprises on Community matter: Companies are pro-actively provided with information through seminars, workshops, bulletins, guides, the Internet, a range of publications and awareness-raising activities. These events and publications can be specialized or generic and are offered in local languages. EICs also directly answer about 500,000 queries from SMEs every year. They concern a wide range of issues, such as business co-operation, Commission programmes and funding, as well as general EU matters.

•

Advise SMEs on the application of Community legislation, regulations: EICs perform an advisory role in a wide range of business sectors. They have expertise in areas of specific interest to companies such as: public procurement, business cooperation, financing, market research and European legislation. EICs also advise companies on opportunities provided by Commission programmes, as well as on current and proposed Community legislation.

•

Assist SMEs in positioning themselves in the European market: The EIC network assists companies to take advantage of business opportunities and can expose them to markets and possible partners in 42 countries. The result of having a well coordinated network at their fingertips is the prvision of efficient and effective strategic help for SMEs. Working with in-house specialists, EICs help companies to apply for Commission projects and fulfil administrative formalities. They also organise trade missions and provide information on programmes, which relate to both EU and non-EU countries and internationalisation.

53


•

Provide feedback to the European Commission about Community matters affecting SMEs: SMEs can directly influence European Community legislation and programmes via their local EIC. The network feeds back company concerns to the Commission in confidentiality, after having collected informaion through a variety of means, such as direct discussion, regional surveys, or participation in consultation panels. EICs are also an integral part of the Commission's Interactive Policy Making (IPM) initiative. IPM is aimed at improving governance by collecting and analysing reactions in the marketplace for use in the EU's policy-making process. With permission from the company, EICs submit information to the IPM database about the problems encountered. The database contains information on more than 10,000 enquiries to EICs.

In order to realize these missions EICs: •

provide information about European public tenders or programmes,

•

supply accurate market or country analysis,

•

provide advice on European Directives, regulations and legislation,

•

help businesses apply for European Commission funding or projects,

•

assist companies to export within Europe and internationally,

•

help businesses find trade partners, investment opportunities or suppliers,

•

support companies who introduce innovations,

•

help with conformity assessment.40

Of course, in such a diverse network, there is a huge variety in the activities individual EICs carry out to achieve these aims. These activities are influenced by factors such as the role and mission of the host structures, the budget available to the EIC, regional disparities, types of industry in the region and the expertise of staff, etc. Nevertheless, there is a big difference in the activities between EICs in the EU and EEA countries and the EICs in the accession states. The EICs in the EU and EEA countries have often been in the network for a long time and their role has changed over the years. Companies in these regions do not consult them as much for basic information on the EU, simply because the Single Market and the EU are nolonger considered new concepts in these countries and so companies no longer require basic information on them. Instead, 40

http://europa.eu.int/comm/enterprise/networks/eic/eic.html - 25 October 2003, 15:23

54


SMEs rather require practical help on accessing the opportunities presented by the single market. In candidate countries, on the other hand, most of the activities are concerned with providing basic information on the EU, its regulations, the available sources of fund and the changes expected after the accession.

5.3 The Activities of EIC Budapest ITDH’s Euro Info office was established in September 1991 with the name Euro Info ’92, under a Belgian-Hungarian intergovernmental initiative. The founding partners were the East-Flanders Development Agency (GOMOV) from the Belgian side and the legal predecessor of ITDH, HIT (Investcenter Tradeinform) on the Hungarian side. That time the office functioned as the relay-point of the Euro Info Centre of GOMOV. Since April 1995 the office had been operating in the status of a Euro Info Corresponding Centre (EICC), and from July 1999, in line with the contract signed between ITDH and the Enterprise Directorate General of the European Commission, the Centre has become a full member of the EIC network. To prepare enterprises for accession and to mediate the EU’s enterprise policy, EIC Budapest carries out the following activities: consulting and dissemination of information, organisation of seminars and operation of information stands, publications, business partner exchange. EIC Budapest has six permanent employees at the moment dealing with the following 5 key areas: product safety (CE marking), Community programmes open to Hungary, foreign trade between Hungary and the EU, environmental protection and EU public procurement tenders. The Centre possesses a rich collection of documents including publications, journals, databases published by the official publication arm of the Commission (Eur-Op) and other domestic and international organisations, as well as legal rules, studies and documents regarding the status of SME’s in Hungary. 5.3.1 Answering Questions Answering questions on EU themes is the one service that all EICs in the network offer. It is the best way for clients to get answers to questions of their own specific interest. On the

55


other hand, it is the best way for the EIC to survey in what topics entrepreneurs are most interested in. Clients have the opportunity to ask their questions personally, by phone, by email or via fax. It is the responsibility of all employees of the EIC to register information on a registration form considering the details of the company/person asking the question (name, address, phone number, etc.), the sector they are active in, and the topic of the question. (See Appendix 4.) EIC’s client service registered 792 questions in 2002, out of which 406 were questions from SMEs and 33 from large enterprises, while the rest (353) wes registered from the host organization (ITDH), public institutions, consultants, other EICs and from trade and professional associations. Most questions were related to business partner exchange (204). The second most popular subject was “Standardisation, Certification and Quality”, with 147 questions on the topic. “Programmes and Sources of Funding” (88) and “Customs and Taxation” (50) were the third and fourth on the list. It is well worthy of mention that only 25 questions were registered in the topic of “Public Procurement”, which is very low, considering the fact that Hungarian SMEs have the right to participate in the EU’s public procurement tenders. In 2003 EIC Budapest registered 689 questions; 395 from SMEs and 24 from large enterprises. This means that the proportion of questions from SMEs increased by 6% compared to the year before, and is now stands at 57.33%. This is a positive result since the main objective of the EIC is to provide assistance primarily to SMEs. The proportion of new clients increased to 32.37% compared to the 2002 data of 25.51%. This might be due to the fact that EIC Budapest tried to deal extensively wiht the promotion of the EIC in 2003 and improved co-operation with the mass media as well. Concerning the topics covered by the questions the number of inquiries for business partner exchange has significantly decreased. On the other hand, a remarkable 7% increase occurred in the proportion of clients interested in public procurements since last year. This is due to the increased success of EIC’s Tender Club organized in co-operation with BAU-DOK Foundation. The members of the Club are informed of the tenders that are relevant to the profile of their company and have been published in the Official Journal. They are provided with information on how to fill out tender-brochures and, after a six months period they could test themselves by making trial applications. The EIC regularly updates its website 56


with information about the rules and opportunities of public procurement in the EU. As of October 2002 the EIC receives weekly summaries of tenders, published in TED and adds it to its website. According to client’s needs, personal consultation is also provided. Interest for the topic labelled “Environment” also increased by 4%. The reason is that people the EU puts greater emphasis on environmental issues, which entails that companies have to comply with an increasing number of expactations in order to stay competitive after the accession. A 4% decrease occurred in the topic “Standardisation, certification, quality” probably because the EIC did not put so much emphasise on this topic in 2003. Last year EIC started the publication of a series of brouchures concentrating on the CE marking of industrial products. Last year 9 issues were published in this series and several presentations were held on the topic as well. Table 5.1: Answered Questions in proportion of Total Questions at EIC Budapest, 20022003

Total number of questions New clients Proportion of questions on: Business co-operation Customs and taxation Environment EU legislation General and institutional matters Market information National policies and legislation Programmes and sources of funding Public Procurement/Tenders SME policies Standardization, certification, quality ∗until the end of November 2003

2002 792 25.51%

2003∗ 689 32.37%

25.76% 6.31% 2.15% 5.05% 3.28% 2.65% 3.66% 11.11% 3.16% 5.93% 18.56%

12.48% 6.53% 6.10% 8.56% 3.19% 2.18% 2.47% 10.45% 10.16% 7.11% 14.08%

“Business Co-operation” has remained the most popular subject in 2003. “Standardization, certification, quality” and “Programmes and Sources of Funding”, were the second and third most popular subjects in both 2002 and 2003. “Public Procurement” became the fourth, although in 2002 it was only the ninth most popular area. “Customs and Taxation” fall back by three places compared against 2002. The following figure shows the distribution of questions covering a range of topics in 2003.

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Figure 5.1: Distribution of Questions Answered by Topic

Standardization, certification, quality Business cooperation Programs and Sources of Funding SME policies 10.45%

Public Procurement/Tenders

7.11% 10.16%

12.48%

8.56%

EU Legislation Customs and Taxation Environment

6.53% 14.08%

6.10% 14.95%

1.74%

3.19% 2.18%

General Institutional Matters National Policies and Legislation Market Information

2.47%

Social Policy and Employment Other

5.3.3 International Projects The involvement in international projects is very important since they help to improve the competitiveness of SMEs in EU border regions and to develop their trade relations and industry links with SMEs in the neighbouring countries and the rest of the EU. For this reason the Centre participates in several of these projects with the intention of providing SMEs these opportunities at an affordable price. Most of these events are supported by the

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European Commission and ITDH also covers some of the expenses. This is why these events are relatively cheap for the SMEs –usually about HUF 30,000. Last year EIC Budapest together with other EICs and organizations, applied for a proposal called “Regional Partnership Events for SMEs in EU Regions Bordering the Candidate Countries issued by the European Commission”. The European Commission approved the application in December 2002. The programme started in January 2003 under the name PAVE-Partner Events in Europe, and an expected duration of 18 months. Its aim was to support companies in the border regions of the EU in strengthening their competitiveness and easing their access to markets in eastern and Western Europe by a number of targeted offers. The project’s highlight is the international cooperation exchange, held in February 2004 in Rostock-Warnemünde. 250 participants from 7 EU member countries and from 7 accession countries are expected to attend the business talks. At the same time, participants will be given the unique opportunity to get an idea of 14 European market segments. With the coordination of EIC Magdeburg a new IBEX ENTEC 2004 project was launched in early 2003. EIC Budapest joined to the project as a partner. In the framework of this programme an “International Buyer’s Exhibition” will be organised in Magdeburg between 2-4 June 2004. The event will be focused on the energetics sector and the environmental protection industries. Companies from 32 countries (buyers and suppliers) will present at these meetings. EIC Budapest must collect 3 buyer and 15 supplier companies to the event. EIC Budapest takes part in the initiative “Looking Eastwards: Challenges and Opportunities for Innovative Companies in EU Border Regions (Look-East Net), co-financed by the European Commission – DG Enlargement, in co-operation with partners from Austria, Belgium, Bulgaria, Greece, Italy, Romania, Slovenia and Spain. The aim of the project is to promote economic development of three EU border regions - Friuli-Venezia Giulia in Italy, Eastern Macedonia in Greece and Carinthia in Austria – in order to improve the competitiveness border-region SMEs and to develop their industrial- and trade relations with the SMEs of the new member states of Central- and Eastern Europe, as well as to foster cooperation between SME development institutions.

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The project includes the organisation of three partnership events, each focusing on three different sectors with the participation of SMEs, sector associations and local development agencies from the participating countries. Each partnership event will include: •

one plenary conference to analyse the EU enlargement process;

•

thematic workshops on in-depth issues per each sector;

•

planned bilateral meetings between enterprises and economic operators;

•

and a permanent exhibition area dedicated to regional, national and international financing institutions and business organisations promoting their services for SME internalisation and innovation.

The first event will take place on 12-13 December 2003 in Italy. 5.3.4 Case Study: PAVE project The project is a trans-European one, with trade events and activities carried out in Warnemünde, Mecklenburg-Vorpommern (DE) and Graz, Steiermark (AT). The first event will take place in Warnemünde, on 23-24 February, the second in Graz on 19-20 April, 2004. Each will concentrate on specific sectors; such as metalworking, machinery and electro-mechanical industries in the Steiermark region, or food processing and food process automation sectors in Mecklenburg-Verpommern. The aim of the project is to improve the competitiveness of SMEs in the participating sectors of all the participating regions. This is best achieved by enhancing their competitiveness and efficiency and improving their access to both European and enlargement markets, as well as by increasing both cross-border and intra-European cooperation and contacts. The PAVE project aims at training participants from the threatened companies to ensure that they benefit from the enlargement in terms of market access. It will also provide them with market information and training, to yield access to the internal European market, where their presence is currently limited. The PAVE project will carry out a number of activities to realise these objectives. These activities include; •

Fostering co-operation between participating SMEs, by organising experience groups to share common problems and solutions. Experience groups will include a

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variety of small and large companies, which can either discuss their individual problems, or include the assistance of larger businesses as mentors. •

Stimulation of transnational and cross-border activities by participation in company meetings from the local border region and the nearby Central Eastern European border countries.

•

Stimulation of transnational and cross-border activities by providing training in identification of market opportunities, establishment of export/import pricing, negotiations, contracts and account management.

•

Provision of access to experts in technical, financial and management areas by holding trainings on quality control, standards, environment, management, IT, outsourcing, financing and human resources, just as to mention a few.

By both organising trade events and conducting market training, the PAVE project will increase cross-border co-operation on a win-win basis and will also improve trade within the internal market in general. EIC Budapest, among many other international institutions, takes part in the project as partner of the co-ordinator EIC Viborg, and thereby is a subcontractor of the deal signed by EIC Viborg and the European Commission. Under the contract EIC Hungary is obliged to identify and recruit 15 SMEs in the specified sectors and assist the project co-ordinator with all necessary documentation as and when required is required to the project. The first partners’ meeting took place in Magdeburg (DE) on 16-17 June 2003. The meeting was used to ensure that all partners have a clear understanding of their roles in the project and to finalise the time plan. Such formal meetings will be held on a regular, approximately bi-annual basis within the PAVE project, since they prevent partners from working in isolation and provide an excellent opportunity to compare working practices and solutions, as well as to brainstorming. After signing the contract in June 2003 with the organizers, EIC Budapest started the first round of the recruitment process and the marketing of the Warnemünde event. In order to recruit the highest possible number of Hungarian companies for the event, the EIC relied on the ITDH’s internal database to select the relevant companies only. With the help of this database 382 companies were identified and targeted, and they received the details of the project along with the application form via simple or eletronic mail. The 14 regional offices of ITDH and the 9 other EICs in Hungary were also informed and asked to help promote the

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event. In addition, many relevant branch associations, including the Hungarian Biotechnology Association the Federation of Hungarian Food Industries, and the National Association of Hungarian Engineering Industries, were contacted. Both events were advertised on the EIC website and brochures were distributed on EIC seminars, as well as on professional fairs and exhibitions that the ITDH or the EIC attended. July 29 was set as the deadline for pre-application and catalogue registration. Only four Hungarian companies applied in the first phase of recruitment. The catalogues of the trade events were prepared and distributed by the end of September, describing the profile of the participating companies, including all salient business information, contact addresses, and desired field of co-operation, as well as some illustrations and/or pictures. The recruitment process for the Graz event started just as the second round of the Warnemünde recruitment began. For the Germany meeting 300 additional, for the Austria meeting 600 new companies were selceted from the database. These companies were notified by mail. Partners and branch associations were contacted regularly to assure close co-operation. The attention was drawn to the catalogue, available both online and in published version, containing a list of the (pre-)applied applicants. Those applied or interested can use the catalogue to select the companies they would like to meet in person. Meetings will be organised throughout the two-day events. Each meeting may last a maximum of 30 minutes, though supplementary meetings may also be held after the event and in the evenings on an informal basis. 6 more companies applied in the second round of the recruitment. Once the trade events have been finalised, the website will provide a fully searchable catalogue of the participating businesses, who have registered for the trade events in Warnemünde and Graz. 100 participating SMEs from the two regions, along with roughly 175-225 other regional SMEs for each event will be visible on the site. Companies from the rest of Europe and the CEE regions will thus be able to surf through the list and identify those with whom they would like a personal meeting. Requests for personal meetings will also be bookable online. All participating companies will be added to the online catalogue. Companies that have registerd early on will be included in the paper version as well. Postevent activities include the implementation of direct training events, seminars and experience-sharing groups.

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5.3.5 Seminars EIC Budapest organizes regular seminars independently, or in co-operation with other professional institutions, covering topics relevant to SMEs’ interest. Seminars are delivered by the most well-informed and qualified experts invited from Hungary and all across the EU. These seminars are free of charge, those interested are only asked to fill out an application form. EIC Budapest started a seminar series called “Preparation for the European Union” in 2003 including sector- and topic-specific seminars, as well as seminars on environmental protection. The first seminar in the framework of this series was held on 5 March 2003 with the title “Challenges, Opportunities for Automotive Industry”. Its aim was to inform the representatives of the automotive industry on issues related to EU accession. Experts from professional organisations - the Ministry of Foreign Affairs’s Multilateral Trade Policy Unit, the Ministry of Economy and Transport’s SME Assistance Unit, and the SME Development Financial Co. - were invited to give up-to-date information on topics that affect companies in the automotive sector including customs regulations, available programmes and sources of funding; and advice on how to write tenders. Although the seminar’s agenda and the invitation cards were distributed among about 400 relevant companies, only 49 companies attended on the event. The second seminar, called “Protection of air pollution and noises, industrial risks” was organised on 25 March 2003. Relevant ministry officials held presentations concerning environmental protection, air- and noise pollution, the importance of industrial risks and prospective changes after the accession, and funding opportunities for the environmental sector. From the invited 250 people 44 participated on the seminar. Of this, 38 were companies. Other participants included consultants, representatives of public institutions and trade and professional associations. The third seminar was organised for SMEs operating in the cosmetics industry on 29 April 2003. The invited experts came from the Customs and Finance Guard, the General Inspectorate of Consumer Protection, the Ministry of Economy and Transport, and the Prime Minister’s Office. The presentations dwelled on EU expectations in this sector, and

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the chances of SMEs in the EU public procurement and the Hungarian tenders. 61 SME representatives attended this seminar. May 14, 2003 saw the fourth seminar of the series, which focused on companies from the textile industry. An expert from Germany spoke about the situation of the textile industry worldwide, devoting special heed to the EU. Other presenters spoke about import licence regulations, TARIC and tax systems, and about the VAT in the EU. 99 companies participated in the event. The second seminar in the subject of environmental protection was held on 20 May 2003, called “Waste management”. The seminar emphasised the prospective changes of the waste management system after accession, along with the importance in the collection and recycling of packaging waste. From the invited 300 people 58 attended the seminar. Of this 45 were SMEs. The sixth seminar was organised on 21 May 2003, with the title “Challenges and Opportunities for the ICT Sector” and 66 people attended. Its aim was to inform the representatives of the ICT sector on relevant issues connected to the enlargement. Experts from the Ministry of Informatics and Telecommunication, as well as from other professional organizations, were invited to advise the participants. The second half of the year started with a seminar on environmental protection on “Waterand Soil-Protection” with the participation of 70 company representatives. Experts from the Ministry of Environment and Water spoke about the changes in legislations concerning subterranean and surface water protection, sharing the experiences of international cooperations in the issue. The topic-specific seminar series started in the second half of the year. The seminar called “How to participate on public procurement tenders of the EU?” was held on 15 October 2003. Presenters were invited from the Ministry of Justice, the Department of European Community Law; the EIC Munich and the ITDH’s representative office in Wien. The programme included presentations on EU public procurement legislation, the requirements of the public procurement market and some international co-operation opportunities. The audience was introduced to the TED database, which provides users access to the latest edition of the Official Journal of the EU, and thus to all calls for tenders. The seminar presented a case study - a Hungarian company winning an EU tender – to try to give some practical advice to the audience. This was the second most successful seminar during the year with the involvement of 85 SMEs.

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Experts from the Ministry of Economy and Transport, the Hungarian Road Haulage Association and the Hungarian Customs and Finance Guard were invited to the seminar called “Transportation in the EU”. The seminar provided useful information on EU legislation, on infrastructural developments with EU support, on the changes in customs regulations after the accession, and on tendering opportunities for logistics companies. 74 SMEs attended the seminar. The “Free Flow of Products on the Internal Market” seminar provided its audience with general information on EU competition policy, on the Intrastat system of the EU, and on various concession constraints in the customs procedures. The seminar was helped by professionals from the Hungarian Competition Authority, the Ministry of Finance and the Central Statistical Agency. Interactive sections were also provided on specific topics, such as the “Use of CE Marking in the Light Industry” and “Design and Sample Protection in the EU and Hungary”. Here the participants had the opportunity to ask questions and hold free debates with each other as well. This seminar took place with 58 company representatives. The second seminar on environmental protection dealt with the “Application of Environmental Legislation in the EU”. Two presenters were invited, one from the Ministry of Environment and Water, the other from the National Inspectorate for Environment and Nature Conservation. After a general introduction to the main issues the audience, as part of an interactive lecture, had the opportunity to discuss their views on economic instruments and the activity licensing system in environmental policy. The event took place with the participation of 53 people. On 3 December 2003, a seminar was organised with the title “Taxation and Accounting in the EU”. This seminar was especially useful for companies providing financial services. Presentations offered general information on tax harmonization, the VAT (Value Added Tax) system of the EU, and accounting regulations. 65 SMEs showed interest in these topics. After the positive feedback on the sector-specific seminars, the EIC organized two more events concentrating on specific branches. The first, “Wood Processing and Furniture Manufacturing”, dealt with tendering opportunities, export possibilities and service providing in the EU, with the participation of professional organizations, such as the Tax and Financial Control Organization and the National Professional Association of Forestry. This was the most popular event in 2003 with the participation of 91 companies. The other seminar, “Construction Industry in the EU”, provided useful information on future opportunities of the industry, including infrastructural project-possibilities, Structural 65


and Cohesion Fund projects in preparation, and public procurement tenders. Case studies were introduced to provide practical information on ISPA support processes. 53 SMEs turned up at the event. The staff of EIC Budapest also participated in about 50 events organized by other institutions, where they introduced and publicized the national and international activities of the EIC Network. 5.3.6 Promotional Activities The organisation published a series of PR articles in the Hungarian economic daily newspaper “Napi Gazdaság”, in order to spread information about services of the EIC and the key expertise areas of the staff. 18 other articles, 35 television- and 5 radio interviews were broadcasted, all in connection with the activities of the EIC during the year. Five information leaflets compiled last year on the core expertise areas of the EIC. These information leaflets and the publications of EIC Budapest have been distributed among clients and seminar participants, as well as to information offices providing data about the EU in Hungary. The organization also contacted new institutions, founded in the first half of 2003, related to EU communication in Hungary: the European Union Communication Foundation, the EU Office of the Ministry of Internal Affairs, the EU-Line of the Ministry of Foreign Affairs and the future office for Structural Funds in the Prime Minister’s Office. The leaflets indicate the contact data of all Hungarian EICs. ITDH’s regional and representative offices both in Hungary and abroad are informed about the actual news and fresh publications related to Hungary’s EU accession via the Intranet system. This ensures that Hungarians travelling or staying abroad may also receive information on the activities of the organization as well. Information about upcoming events is disseminated to relevant companies using the ITDH’s internal company database. Invitations and seminar application forms are sent to an average of 500 companies each time by simple or electronic mail. They are also regularly published in the monthly EU Event Calendar of the Delegation of the European Union to Hungary, as well as its European Information Centre. EIC keeps its clients informed through its regularly updated web site, which covers the following areas: introduction of the EIC Network, partner organisations, news, events and upcoming programmes, SME policy in the EU, public procurement, CE marking and environmental protection in the EU.

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Since 2003 was an exceptionally important year in the 10-year process of Hungary’s EU accession, EIC Budapest had several invitations by various institutions to present its activities and services. During each presentation, the organization has always underlined the importance and usefulness of the network

5.4 Evaluation One must bear in mind during evaluation that EIC Budapest is only one of the nine offices currently operating in Hungary, although 2 of these had only been formed in November 2003 (See Appendix 3 for map). The other Hungarian members of the network carry out the same activities, although with much smaller audiences, since there are about 2 million people living in Budapest, while the average population does not exceed 380 thousand in the other cities. There are also other public institutions that deal with preparation for EU accession, such as the European Union Communication Foundation, the EU Office of the Ministry of Internal Affairs, the EU-Line and the European Information Points of the Ministry of Foreign Affairs, the Euro-Information and Documentation Service Centre of the Budapest Chamber of Commerce and Industry, the European Information Centre of the European Commission Delegation to Hungary, and the Euro Info Service network. However, as member of the EIC network operated by the Enterprise Directorate General of the European Commission, the Centre has some special attributes. It has direct contact with EU institutions and thus possesses the most up-to-date information on current Community issues. Within the frames of the Enterprise DG there is a special professional team that is involved in the support and supervision of the network (Technical Assistance Unit, TAU). The EIC network is also part of the B2Europe initiative, aimed at enhancing co-operation between Community business support networks. As part of the initiative, EICs will refer SMEs to other, more specialised networks if needed. Another key element in the development of the network is the operation of the Steering Group. EIC national representatives and Commission officials meet three times a year to discuss the main issues of the network’s activities. The Steering Group's observations are taken into account in the decision-making process of the Enterprise DG. All in all, the EICs have the most extensive information sources, which enable them to provide enterprises with the most relevant information and thus to assist them in their success.

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The Centre is also unique in its relationship to clients. Enterprises can get specific and relevant information via the centre’s client service. During the interactive seminars clients have the change to discuss their ideas with both experts and each other. Although answers to questions are provided on average within one week, the number of inquiries is still law, especially from the SMEs that are mostly affected and endangered by the EU accession. Interestingly, companies show little interest in international projects that would provide them with the opportunity to develope strong international relations essential for their success. Nevertheless, personal invitation to these projects is distributed to an average of 500 SMEs, whilst projects are also promoted via the Internet and written press. EIC has difficulty in recruiting even the minimum number, usually 15, to these events. The same is true for the seminars. For the last two years the EIC has been working hard to organise seminars that cover all the important branches for SMEs, and to reconcile these with the topics that they are most interested in. In 2002 seminars were held for SMEs working in the following sectors: trade, catering, construction, and education. The sectorspecific seminars in 2003 covered the following industries: cosmetics, textile and automotive industries from the manufacturing sector; transportation, forestry, and construction. On all of these seminars presentations were held on public procurement and funding opportunities (the second and third most popular topics), as well as on EU legislation linked with the sector. 80% of the seminars included additional information on standardisation, certification and quality issues (the most popular), plus on customs and taxation (the fifth most popular). So far EIC covered all the most important sectors for SMEs (see Figure 5.2). The topic-specific seminars gave mostly practical knowledge on general topics, such as public procurement procedures and the internal market, which are useful for traders, taxation and accounting experts, and also for SMEs providing financial services. Figure 5.2: Branch Distribution of Active SMEs in 200141

41

Created by the author on the basis of: State of Small and Medium Sized Business in Hungary Annual Report 2002. Hungarian Institute for Economic Analysis, 2002, p. 79

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Real estate Trade 2.4% 2.7%

2.6%

Manufacture

6.2%

29.3%

4.5%

Construction Transport

4.9%

Hotels, catering Agriculture, forestry, fishing

5.2%

Health care 8.7% 9.9%

Financial services 23.6%

Education Other services

In spite these events providing the most relevant information from experts and via meetings with other enterprises in the same industry, participation is low. Promotional work connected to these events is also very strong, but produced no tangible results in arousing a large-scale interest.

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Conclusion In Hungary more than 99% of all enterprises are SMEs, offering employment to more than two thirds of the overall labour force, and generating nearly half of the GDP, while they contribute 11% of the export sales. Small and medium-sized enterprises constitute an increasingly significant sector of the Hungarian economy with regard to their weight in employment, GDP-generation and exports. For this reason, the success of Hungary’s EU integration will very much depend on their performance and capability to respond to market challenges set up by the Single Market. A distinct improvement of corporate competitiveness is a precondition to joining the European Union. The Internal Market will provide enterprises with many opportunities but equally, for many, in particular for SMEs, the Market is still a threat. In order to minimize the risks and maximize the opportunities associated with accession coordinated efforts by the state administration, chambers, professional associations and other representations of interest have been developed over the past years to increase support for them. The Hungarian government have recognized the need to establish a more stable business environment for the creation and development of SMEs and consequently have taken important steps in the approximation of their legislation in this field. After creating the legal basis of SME promotion in 1999 (Act on the Development of Small and Medium-Sized Enterprises and the Promotion of Their Development) Hungarian governments focused on developing programmes aimed at two fields of the SME acquis: measures aimed to improve SMEs’ environment by removing unnecessary administrative, financial and legal constrains, and measures to provide support to SMEs via various financial instruments and programmes. The SME Development Programme of the Széchenyi Plan launched by the former government of Hungary concentrated on providing non-repayable, direct forms of subsidies through tender applications. As opposed to the Széchenyi Plan, the Széchenyi Enterprise Promotion Programme focuses more on providing loan, guarantee and credit schemes instead of non-repayable assistance. Despite of the various forms of subsidies the supported circle of enterprises is quite limited to the relatively capital-strong enterprises. A more balanced approach should be developed in order to provide the less creditable companies (micro- and small-enterprises) with non-repayable and the more developed with other forms of subsidies.

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These shortcomings should be compensated by supports from the Structural Funds available after accession. The future success of the SME sector is up to the fact how successfully the National Development Plan will be managed. The European Union also provides assistance for SMEs in the candidate countries. Indirect support is available under different sub-programmes of PHARE but experiences show success in a narrow circle. So far, Hungarian SMEs could not obtain support from the financial instruments of the Multiannual Programme for Enterprise and Entrepreneurship (2001-2005) mainly due to the lack of information about these opportunities. The most successful among all have been the operation of the EIC Network, although its advantages have not been fully exploited. Public procurement processes also play a vital role in increasing the level of SMEs’ competitiveness. SMEs should be aware of the fact that EU public procurements are open for Hungarian companies and should be involved in as many processes as possible to gain bigger market share. Government procurement rules should account for the legitimate interest of SMEs and provide a favourable legal framework for them. It can be concluded that further steps in developing SME policy should be taken to simplify legislation and the administrative environment, to strengthen support structures and further develop SMEs’ access to finance. Moreover, the aim is also to make it easier for them to take part in Community programmes by offering them an additional means of access. The support should be transmitted more effectively to SMEs, and the banking sector, international financing institutions and funds should further improve their co-operation and better co-ordination of their SMEs activities. The most important means of raising the level of competitiveness is to familiarize entrepreneurs with their present opportunities and with the market conditions they will have to face after accession. For this reason, this corporate category requires more careful attention from the government as well as from entrepreneurs themselves. At the current stage of preparation it is far more important to provide businesses with appropriate information than to strengthen them by capital injections. On the other hand, entrepreneurs have to realise the importance of familiarising themselves with each and every condition of the market and make themselves aware of their own endowments and drawbacks. If it is done so, their main potentials could be fully expoited and thus they can contribute to the goals of the Lisbon summit to achieve a dynamic and knowledge-based economy in Europe, competitive worldwide, in the next ten years. 71


Appendices: Appendix 1: Comparative Indicators of Enterprises in Europa-19 and in Hungary Appendix 2: Objectives, Priorities and Operational Programmes of NDP Appendix 3: EIC Network in Hungary Appendix 4: Client Registration Form of EIC Budapest

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Comparative Indicators of Enterprises in Europa-19∗ and in Hungary

Europa -2000 Hungary -2001 Number of enterprises Eu-19 (1 000) Hungary Eu-19 Employment (1 000) Hungary Occupied persons per Eu-19 enterprise in average Hungary Eu-19 Turnover per enterprise (million €) Hungary Share of exports in Eu-19 turnover (%) Hungary Value added per Eu-19 occupied person Hungary (€1 000) Share of labour costs Eu-19 in value added (%) Hungary

Micro

Small

Medium

SME Large Total total 20 415 40 20 455 687 4 691 80 790 40 960 121 750 2 014 976 2 990

19 040 658 41 750 1 150

1 200 21 23 080 412

170 8 15 960 452

2

20

95

4

1 020

6

2 0.2 0.03 7 5

20 3 0.6 14 8

56 24 3.5 17 14

3 0.6 0.09 13 9.9

266 255 26.2 21 32

4 1.1 0.2 17 23

40

75

105

65

115

80

3

8

15

5.8

26

14

66

66

58

63

49

56

63

66

58

62

46

52

∗Eu-19: the 15 Member States, plus Liechtenstein, Norway and Switzerland Source: Observatory of European SMEs 2002, No. 2., SMEs in Europe, including a first glance at EU Candidate Countries and computation based on APEH data. State of Small and Medium Sized Business in Hungary Annual Report 2002, Hungarian Institute for Economic Analysis

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Objectives, Priorities and Operational Programmes of NDP Long-term objective

IMPROVING THE QUALITY OF LIFE

Overall objective

Specific objective

Priority

REDUCING THE INCOME GAP RELATIVE TO EU AVERAGE

Increasing

Improving the use

Better

economic

of human

environment

Improving the competitiveness of the productive sector

Economic Competitiveness OP

Increasing employment and the development of human resource

Agricultural and Rural Development OP

Providing better infrastructure and cleaner environment

Strengthening regional and local potential

Development of Human Resources OP

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Environmental Protection and Incfrastructure OP

Technical Assistance

Regional Development OP


EIC Network in Hungary

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Client Registration Form of EIC Budapest

Company:..................................................................... Name: ........................................................................... Address: ....................................................................... ....................................................................................... Tel:................................................................................ Fax: ............................................................................... E-mail: .......................................................................... Web site:.......................................................................

Reference no:....................................... Date: .................................................... Question by: phone, personally, e-mail, fax Registered by:......................................

Business Card

Type of client: new client 1. Enterprise a) -Joint proprietorship -Sole proprietorship b) Number of employees: -1-10 -11-50 -51-250 -251-500 -above 500 c) Chamber of Commerce Membership: 2. Public Benefit Company (Kht., Association, Foundation, Public Body) 3. Public Institution (publicly financed institutions, educational institutions, etc) 4. Interest Representation Group, Chamber of Commerce 5. ITDH 6. EIC 7. Other EU Network 8. Student 9. Consultant 10. Start-up Enterprise 11. Other, please specify: ............................................................. Sector: Manufacture: 1. Food-products 2. Textile and Clothing 3. Wood, Paper, Furniture 4. Plastic and Chemicals 5. Machines and Equipment 6. Metal 7. Other

Services: 8. Real Estate 9. IT Services 10. Research & Development 11. Legal Services 12. Market Research 13. Financial and Tax Consulting 14. Management Consulting 15. Other

Other: 16. Agriculture, Forestry, Fishing 17. Electricity, Gas, Steam and Water Supply 18. Mining 19. Construction 20. Trade 21. Hotels and Catering 22. Transport, Warehousing, Telecommunication

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Question: a) simple b) complex c) project

If business partner exchange: a) import b) export

Question(s):

Topic of question: 1. Agriculture and Fisheries 2. Business Co-operation 3. Competition 4. Consumer Policy 5. Culture 6. Customs and Taxation 7. Economic and Monetary Affairs 8. Energy 9. Environment 10. EU Legislation 11. Euro 12. General and Institutional Matters 13. Health and Safety 14. Industrial Policy 15. Information Society

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

Method of answering: a) alone b) with help of ITDH

Internal Market Internationalisation/Development Aid Market Information National Policies and Legislation Programmes and Sources of Funding Public Procurement/Tenders Research and Development SME Policies Social Policy and Employment Standardisation, Certification, Quality Structural Fund/Regional Development Tourism Training and Education Transport Others

c) with help of other EIC d) with help of other organisation

Answer(s):

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Bibliography Books: Balázs Forman: Az Európai Unió strukturális és előcsatlakozási alapjai (The EU’s Structural- and Pre-Accession Funds). Interpress, 2003 State of Small and Medium Sized Business in Hungary, Annual Report 2002. Hungarian Institute for Economic Analysis, 2002

Publications: Tamás Mészáros, Zoltán Pitti: A vállalkozási szerkezet módosulása, különös tekintettel a középvállalkozásokra és az EU-sajátosságokra. Európai Tükör, 2003/1 Zoltán Román: A kis- és középvállalatok az EU-csatlakozás tükrében (The SMEs and the EU Accession in Hungary). Európai Tükör, 51., Miniszterelnöki Hivatal Integrációs Stratégiai Munkacsoport, 1999 A leggyakoribb kérdések a magyar európai uniós csatlakozásról (Frequently Asked Questions about Hungary’s Accession to the EU). Magyar Köztársaság Külügyminisztériuma, Budapest, 2002 Enlargement – What can Enterprises in the New Member States Expect? Enterprise Publications, European Commission, 2003 European Union Support Programmes for SMEs. Enterprise Directorate General, European Commission, May 2003 Kis vállalkozások – nagy lehetőségek, avagy az Európai Unió vállalkozásfejlesztési politikája (Small Enterprises – Great Opportunities, SME Policy of the EU). Magyar Köztársaság Külügyminisztériuma, Budapest, 2002 Széchenyi Vállalkozásfejlesztési Program (Széchenyi Enterprise Promotion Programme). Ministry of Economy and Transport 2002

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Articles: Katalin Kiss: Tanácsadás a kis- és középvállalatok esetében az EU csatlakozással kapcsolatban (Consulting among SMEs in accordance with EU Accession). Humánpolitikai Szemle, XIV. évf., 2003/7-8 Bea Major: Kisvállalkozások az EU kapujában – Meglepetések helyett felkészülés (SMEs in the Door of the EU – Preparation instead of Surprises). Cégvezetés, 2002/8 Konjunktúra-indexek. ECOSTAT – Gazdaságelemző és Informatikai Intézet, 28 August 2003

Web Sites: http://www.signform.be/cape/Survey2003.pdf http://www.mva.hu/ http://www.mkik.hu/ http://www.gkm.hu/ http://www.om.hu/ http://www.fn.hu/ http://www.ecostat.hu/ http://www.nfh.hu/ http://www.publictender.co.uk/ http://www.euoldal.hu/ http://europa.eu.int/ http://europa.eu.int/comm/eurostat http://eiro.eurofound.ie/

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Legislations: Commission Recommendation (EC) No 96/280 of 3 April 1996 concerning the definition of small and medium-sized enterprises Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, C(2002)/1422 Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds Act XCV of 1999 on the Small and Medium Sized Enterprises and the Promotion of Their Development of the Republic of Hungary Act XL of 1995 on Public Procurement of the Republic of Hungary

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GETTING READY FOR THE EU

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