Academic journal article The McKinsey Quarterly

Hungary for Reinvestment

Academic journal article The McKinsey Quarterly

Hungary for Reinvestment

Article excerpt

The privatization of government assets has supplied many develop in countries with their main source of foreign direct investment in recent years. But that money is now drying up--a problem brought on by the very success of privatization. To an increasing extent, the most important channel for foreign direct investment in many countries is reinvestment by existing businesses (Exhibit 1).

In a 1999 study of Hungarian investments made by 42 companies belonging to the Investors' Council, which represents foreign investors in Hungary, McKinsey found many companies ready to reinvest there, at least under a sympathetic government. Half of the fears mentioned by the companies related to government policy (Exhibit 2, on the next page).

These 42 companies have invested some $9 billion in Hungary, 41 percent in greenfield projects and 59 percent in assets obtained through privatization. About 70 percent of the companies said that they planned new investments in the country--mostly fresh equity investments--in the next three to five years (Exhibit 3). But during that time, they expect their total annual reinvestment to reach only $500 million to $530 million, just 40 percent of what privatization spurred them to invest.

The companies do believe that Hungary has progressed over the past two years (Exhibit 4): about half, for example, say that the legal framework now has greater stability. But a third feel that the government has become less consistent in its policies and commitments. For the future, the companies want such improvements as an investment code, greater openness in the way new business legislation is introduced (through such means as public hearings and expert testimony), and a mechanism to ensure that businesses keep their commitments.

Participants in the survey were asked about alternatives to investing in Hungary. About 30 percent either saw none or regarded the country as a reasonable choice. A further 30 percent thought that other countries in the former Soviet bloc were good alternatives, while the remainder saw Western Europe or the world at large as alternative locations for investment.

Bruno Coppe and Anthony Radev are principals in the Budapest office, and Jason Lamb is a consultant in the Pacific Northwest office.

                       Sources of foreign investment
                                Percent [1]
              Pre-1999 foreign  Future foreign investment
                 investment    (next five to ten years) [2]
                $21 billion-      -$1 billion-$2 billion
100%=           $22 billion              per year
Reinvestment         25                     36
Greenfield           15                     35
Portfolio            60                     18
Privatization                               11
(1. … 
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