The geography of German companies’ international expansion – Hungary as a host country

Abstract

It is well known, that for decades, Germany has been one of the most important exporter and capital exporter countries of the world. In Hungary, on the other hand, the exportoriented development model is based on foreign direct investment (FDI), within which Germany, as the biggest investor, has a key role. Because one-fourth of the Hungarian FDI’s inward stock and more than half of the reinvested profit comes from German companies (according to MNB, the Hungarian Central Bank) the satisfaction of German investors with Hungary as a host country is a key question for Hungarian economic analyses.

The article analyses Hungary as a host country from the German corporate network’s perspective. It focuses on German companies’ expansion dynamics and geography. One of its most important goals is to answer the following question: How Hungary, as a host country, has been awarded by German investors and how has this changed its position? Which factors can be seen as advantageous, and which as disadvantageous for the Hungarian economy? A further key aim is to clarify those factors which attract investments and those which help to retain them for a longer period.

The article states that among German investors’ motivations market-seeking and costreduction play important roles. The increasing weight of cost-reduction shows an internationalization of the German production network and the high importance of cross-border production optimization, especially in the automotive sector.

During the last decades, the German production network’s host countries have changed. According to a traditional world economy point of view, Central and Eastern Europe has been an important basis of German companies for a long time. After the 2008 crisis, however, the importance of BRIC countries increased. During the ‘90s, Hungary was one of the most important host countries for German firms. But at the beginning of this century, it has lost its leading position in the CEE region. According to German company managers’ opinion, the most critical factor in this was Hungary’s economic policy (like the transparency of decision-making, corruption, and unpredictability). Nevertheless, Hungary’s valuation got better in the last 2-3 years. One of the most important localization advantages of Hungary is its skilled workforce, a basis for higher value-added activities (not only in the traditional manufacturing sectors, like automobile production but even, for example, in R&D and Shared Services too). This is the reason why it is so important that German investors are less and less satisfied with the skilled workforce availability. It is also important that predictability of economic policy is also one of the most important factors for them, and although the perception of this factor is getting better, it is still unfavorable.