Boundless Expansion of Leading Hungarian Multinationals? - Hungarian Outward Investments in 2009-2011

Olivér Kovács, Research Fellow, ICEG European Center  | 

 

Economic scholars, pundits and practitioners are becoming more and more aware of the fact that foreign direct investment can be ranked with one of the basic drivers of development through various channels (i.e. knowledge and technology transfers, triggers of R&D and innovation activities etc.). 

There is no gainsaying the fact that the relevance of FDI, let it be inflowing or outflowing, has gained even more substantial momentum with the intensified globalisation and integration of markets leading to knowledge (or learning) economies in the developed world. Plethora of studies emphasised that FDI in general has positive impetus on countries' competitiveness via strengthening and improving productivity. However, as the European continent's secular productivity trend suggests, it has not been in a benign position compared to that of the United States (See Gordon, 2012).

As a corollary, it seems that increasing FDI does not inevitably lead to improving productivity, the causal relationship is relatively weak as it was articulated clearly by Haskel et al. (2007) as well as Keller and Yeaple (2009). What is more, the study prepared by Kalemli-Ozcan et al. (2013) implies that even very large increases in FDI do not seem to be as important for country-level productivity growth as it was previously assumed.

Against this background, one can observe that trajectories in terms of outward FDI has been conveying a solid message that developing world as well as emerging markets show relatively fast rise by meaning that the classical view of FDI flow, which stated that it flows from developed nations to developing ones, does not apply any more with the same meaning. 

Chart 1. Outward FDI (flows, annual, millions of USD)

Source: UNCTAD (2013)

Let us underscore that the New Member States of the European Union has also countries with a surpassing volume of outward FDI, like Hungary. Hungarian multinational enterprises (MNEs) have been operating quite pro-actively in international market-seeking processes also with the aim at exploring new markets with the necessary resources (oil, gas fields etc.).

Chart 2. Outward FDI in New Member States of the European Union
(1990-2012, million USD)

Source: UNCTAD (2013)

Our recent comprehensive study, written by Magdolna Sass and Olivér Kovács, sheds light on the outward looking behavior of the top 20 leading Hungarian multinationals (Sass - Kovács, 2013). As the study reveals, the 20 MNEs ranked held more than US$ 18 billion in foreign assets in 2011. A decreasing trend can be observed in terms of aggregated foreign asset over the period 2009-2011. In 2011, Hungary was the 22nd outward investor in terms of foreign direct investment (FDI) stock among emerging markets and the 17th largest in terms of outward FDI flows, well below the BRIC countries, but a large investor among the new member states of the European Union. 

References

Gordon, R. J. (2012): Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds. NBER Working Paper No. 18315

Haskel, J. - Pereira, S. - Slaughter, M. (2007): Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?," The Review of Economics and Statistics, Vol. 89., No. 3, pp. 482-496

Kalemli-Ozcan, S. - Fons-Rosen, C. - Sørensen, B. E. - Villegas-Sanchez, C. - Volosovych, V. (2013): Quantifying Productivity Gains from Foreign Investment. Tinbergen Institute Discussion Papers Vol. 58., No. 4, Tinbergen Institute.

Keller, W. - Yeaple, S. (2009) Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the US," The Review of Economics and Statistics, Vol. 91., No. 4, pp. 821-831

Sass, M. - Kovács, O. (2013): A Snapshot of the Leading Hungarian Multinationals 2011. ICEG European Center, Columbia University, Vale Columbia Center on Sustainable International Investment. Available: http://www.vcc.columbia.edu/content/snapshot-leading-hungarian-multinationals-2011-0 or http://icegec.hu/download/publications/research_report_icegec-emgp_2013.pdf Accessed on: 11.09.2013

This post features the author's personal view and does not represent the view of ICEG European Center. 

The Moldovan Economy in the Great Recession

Olivér Kovács, Research Fellow, ICEG European Center  | 

If we take a mere glimpse into the development of real GDP growth path in various country groups, it becomes obvious that the flame of the era of Great Moderation, coined by Stock – Watson (2003), between 1992-2007 has seemingly gone out with the eruption of the 2008 financial and economic turbulence.

With globalisation, economic processes all over the world have become asymmetrical interdependent by leaving merely limited role to a national government to fend off the dramatic consequences of the global crisis by its own. A country’s recovery is getting more and more influenced by growth prospects of another relevant country or a group of countries. It is also reflected in the growth trajectory of Moldova.

Chart 1. Real GDP growth (%, 1992-2018)

         
Note: Data for the period 2013-2018 are estimations.
Source: IMF (2013), World Bank (2013) 

          At this point, we can formulate the following insights on the basis of the Moldovan development: 

• the takeoff started significantly later than in other Continental European countries (i.e protracted growth strengthening was an ubiquitous phenomena in CIS countries during the 1990s);
• up until the midst of the 2000s, Moldovan economy converged to the emerging markets and developing economies (between 2000 and 2008, the average annual real GDP per capita growth rate was 6 per cent), but after 2005, the growth prospect became much more gloomy; 
• the 2008 financial and economic crisis, which infiltrated into the European continent, had substantial repercussions in CIS countries as well being dependent on countries from where remittances are coming back and the main energy resources are imported. In Moldova, on average, the recession was even deeper than in advanced economies, and even in the world (GDP collapsed by 6%). 
• Although mainly expenditure-based fiscal adjustment was implemented to meet deficit and debt targets being accompanied with structural reforms to boost export, the regenerating growth performance of 2010-2011 disposed into the air as the European economic potential weakened further. It has at least two implications for economics: 1) expenditure based fiscal adjustment may not have negative effect on real GDP growth; 2) but the sustainability of the achievements relies heavily on whether the consolidation is constructed along a strategy (i.e. focusing on specific fields like innovation and R&D that potentially will have long-lived positive impetus on the economic performance) or the consolidation is just imagined as a mechanistic stabilisation of deficit and debt targets through reducing various expenditures like wages, salaries etc.  
• During an economic turmoil, and especially in a time when the debt accumulation can be treated as normalcy and their dampening tends to be a decade-long task, fiscal consolidation should be considered not only as a short-term economic policy engineering mechanism to cool down the fiscal challenges, instead, a developing function should be carefully integrated into that which considers longer term strategic vision (inclusive growth, innovation-based knowledge economy etc.);
• Beyond this fact, the volatility-prone Moldovan growth path conveys us the message that the socioeconomic learning, the institutional quality and the growth context of the country still has a lot room for improvement. Its exposure to the economic situation that of its regional trading partners (including the European Union) with regard to remittances, capital inflows and exports can be considered as one of the highest ones among CIS countries. 

  This post features the author's personal view and does not represent the view of ICEG European Center. 

Transparency and Progress – No Easy Way Out

Olivér Kovács, Research Fellow, ICEG European Center  |

In economics, and maybe in all aspects of life, longer term tendencies can offer much more realistic picture about how phenomena happen than any short term and fresh data. Another equally important thumb rule is that building on easily observable, measurable and interpretable phenomena during any kind of analysis can result much precise knowledge. This is because we simply cannot always understand the ‘big picture’ comprehensively and precisely due to its complexity. We tend therefore to understand reality by investigating the microsphere and then approaching the macrosphere upon our obtained knowledge. As in physics, investigating elementary particles then drawing conclusions to the macro, (e.g. to the universe) is treated as an instructive direction of understanding the laws of nature that are not displayed in any code books like the code of Hammurabi or the Civil Codes in modern democracies. This holds in case of economic and societal ‘laws’ as well.

Again, this is mainly because of our limited rationality to understand the whole in its entirety by overcoming the world’s complexity and its nuances, especially that of today when the highly globalised world created an intensively integrated world interspersed with interconnectedness and mutual interdependence by making the system ever more complex to be reckoned with. This is why we often put our focus on certain smaller scale dimensions that can be relatively better articulated, understood and controlled based upon our knowledge unravelled from the microsphere and thus we can set objectives upon them to be pursued. For instance, the issue of increasing transparency is more or less something like this.

When it comes to development economics, there is no gainsaying the fact that studies are likely to regard transparency as one of the conditioning factors of development and sustained growth. There is a predilection to view transparency and fiscal transparency in particular as crucial element in this regard (i.e. Fiscal transparency is often defined as the comprehensiveness, clarity, reliability, timeliness, and relevance of public reporting on the past, present, and future state of public finances – which is vital to effective fiscal policymaking, See: IMF 2013).

Let us add immediately that after a certain level of transparency in the developed world, its importance is likely to become not so obvious. A more intriguing question will be that which countries’ economic policy engineering can keep abreast with time and thus can be more conducive to sustainable growth and development via proper actions. As in sports, we cannot claim with reasonable certainty that a 165 cm tall guy will be a salient basketball player compared to a 185 cm guy; however, after a certain level, we can stress that there is no empirical backing in favouring the suggestion that a guy who is 205 cm tall would be by all means better than his 198 cm tall co-player, Michael Jordan who can be seen as a touche-à-tout, i.e. who has other outstanding skills as well. After a certain level, other aspects become crucial in determining the performance let it be real GDP growth, economic development or increasing well-being in a wider sense, or basketball scores etc.).

Similarly, behavioural and psychological tests convey us the message that a surpassing level of intelligence quotient (IQ) is not coupled with success in life in each cases. What is more, it seems that higher IQ does not guarantee success unless the given person has a good deal of creativity as well on which her/his performance is riding a lot (i.e. creativity is about imagination on what and how to do certain things in tackling challenges and achieving our goals).

Now, let us assume that fiscal policy has reached a good level of transparency in the developed world. We simply cannot ignore the fact that the achieved credibility relies heavily on whether the government can creatively carry out policies (i.e. to emit right signals in the right measures, in the right place and at the right time) that require fiscal backing geared towards sustainable growth and development in a more dedicated way. As a corollary, increasing transparency cannot be seen as a panacea; rather it can be viewed as a technique towards better opportunities to be utilised through policies that often require fiscal support. But it also requires some sort of professionalism, a holistic thinking over the spillover effects of any discretionary intervention which, in turn, cannot be accurately estimated ex ante because of the complexity of our system in which the nonlinearity of effects is the norm, rather than the exception.

After a certain level of transparency, economic development seems to become more dependent on other factors like good formal and informal institutions, the quality of governance in general, the pro-active and due participation of civic society, the ability and willingness of governmental fiscal policies to act adequately in time of shocks by governing the boat of the given economy towards much calmer waves. But, voters and policymakers should always remember that economic success and competitiveness cannot be handled in isolation any more, rather the success depends on the development and governmental activities of other countries being interconnected with the given one. It also requires the government to understand longer term trajectories and trends and to act accordingly which is extremely difficult in an era being pervaded by wicked problems (like climate change, air pollution, and sovereign debt crisis etc. that does not know national boundaries).

In sum, increasing transparency is a necessary, but not a sufficient ingredient of sustained economic and social development. We can claim that social-economic learning still remains one of the most pivotal driving forces of progress. As Leonardo Da Vinci once said, knowledge is not enough, we must apply. It therefore implies that there is no easy way out, we should pursue a public sector being able to learn and put the lessons learned into practice continuously.

This post features the author's personal view and does not represent the view of ICEG European Center.