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Hungary’s SME sector, its Small Business Development policies and the process of European Integration Asistenţă Tehnică pentru Agenţia Naţională pentru Întreprinderi Mici şi Mijlocii şi Cooperaţie Dr. Péter Futó Presentation at the National SME Conference, Bucharest, 3. June 2004 Mixolid Consultancy, Budapest In co-operation with Eurecna CNA Veneto
The beginnings of the small- and medium sized company sector in Hungary
(R)evolution of the SME sector Certain forms of entrepreneurship were surviving during the decades of communism and socialism. The activity of independent traders and craftsmen was legal throughout this period. But the political changes of 1989 have brought a real revolution of entrepreneurship.
The transformation crisis After 1989 many new SMEs were created during the crisis years of 1990-1993. State owned firms have been privatised, splitup, outsourced activities, lost their employment and their markets – leading to the creation of many SMEs. Entrepreneurs „out of necessity” started businesses in order to avoid unemployment. Characteristics of this period: it was easy to establish new enterprises, but only few could enter the stage of growth.
SME statistics Size distribution: ·Hundreds of thousands of micro businesses, ·tens of thousands of small companies ·thousands of medium sized businesses In 2001 two-thirds of Hungarian enterprises functioned without employees (compared to 52% in the EU). Many enterpreneurs are just legally self-employed, in reality hidden employees of firms.
Challenge: productivity Causes of low productivity and efficiency Obsolete technology Lack of funds Weak entrepreneurial knowledge Difficulties in accessing business services and consultingMany SMEs lack Information Technology equipment Lack of IT knowledge
Low efficiency of SMEs SMEs produce one-third of total Gross Value Added and one-sixth of total export sales - with two-thirds of the total manpower.
Challenge: competitiveness To increase competitiveness on foreign markets Most SMEs supply the domestic market and multinational companies located in Hungary. SMEs generally lack the knowledge of EU standards Quality Design Consumer preferences.
Challenge: to bridge the duality of the Hungarian economy Duality of the Hungarian economy: Weak ties between · predominantly Hungarian-owned, mostly under-capitalized SMEs · and the predominantly foreign-owned, technologically advanced medium sized and big companies.
Company integration pendulum Socialist economy: over-integrated big companies Transition: fragmentation of the company domain into hundreds of thousands of SMEs Recent trends: mergers and acquisitions in the SME domain, intensive networking, subcontracting activities, beginning of formation of regional clusters
Challenge: Growth through networking and subcontracting One of the few possibilities of growth: through developing supplier relations with large companies. Most SMEs find it difficult to become subcontractors to local multinationals. Many problems arise from the fact that potential suppliers are ill-equipped · in financial,· technological, · technical, · quality assurance systems (e.g. ISO 9001)· and logistic terms. Today SMEs can join the chain of suppliers of an international company only at lower levels of the networks of suppliers: most Hungarian suppliers to integrator companies are secondary or tertiary suppliers.
Challenge: Economic activity varies by region Regions of the North-Plain and North-Hungary have particularly low number of enterprises. These are regions characterized by higher unemployment and lower entrepreneurial culture
Challenge: SME's difficult access to finance • It is difficult for SMEs to obtain capital. • Many SMEs in domestic ownership are under-capitalised. • Micro and small enterprises borrow a significantly lower proportion than medium-sized and large enterprises do. Only 20 percent of the small enterprises and 30 percent of the medium-sized and large enterprises have any long term credit. • Traditionally, banks estimate that when lending to SMEs, • risks and administration costs are too high • profitability is too low. • Commercial banks have shown the first signs of interest in financing SMEs only after 2000. • Venture capital is still relatively underdeveloped, it focuses mainly on existing enterprises.
Challenge: EU membership • Expected difficulties in satisfying requirements of the European Union in the following fields: • environment protection • work safety, • work hygiene. • Expected difficulties in acquiring and applying know how on • company management, • marketing, • environmental management • financial management
Challenge: Survival of SMEs A considerable proportion of enterprises has a relatively short lifespan. Only 32% of the enterprises started in 1995, and 52% of the enterprises founded in 1997 were operating in September 2001, which is the lowest figure in regional comparison.
Evolution of Hungarian SME development policy • 15 years ago this was a non-existent policy field. • The European Union has helped to develop Hungarian SME development policy through • Transfer of policy know-how through the harmonization of policies and laws • Some 80 Mill Euro financial aid to the SME sector through the PHARE Programme • During the last 15 years a wide range of SME development organizations have developed • in the public sector as agencies of the central and local governments, interest reconciliation bodies and companies owned by the state or by local governments • in the non-profit sector as chambers, trade associations, interest representations and independent foundations • in the private sector:banks delivering SME subsidies and loans, business consultancies delivering training, assessment and project management
Typology of SME development organisations Central InstitutionsEnterprise Development CouncilSME Development Public Benefit CompanyHungarian Investment and Trade Development Agency Network of Enterprise Promotion AgenciesHungarian Foundation for Enterprise Promotion (MVA) and Local Entrepreneurial Agencies (HVKs)Budapest Enterprise Promotion Centre Networks of Intermediate OrganizationsRegional Development AgenciesVenture Capital OrganizationsLoan Guarantee OrganizationsIndustrial parks Networks of Interest RepresentationsThe Chamber System (e.g. Hungarian Chamber of Commerce and Industry)Trade AssociationsOther Business Community Interest Representations Networks of information points and independent foundations for SME trainingEuro-Info Centres (EICs), SEED Small Enterprise Development Foundation, etc.
Act on Small and Medium Sized Enterprises in 1999 • Its contents • Definition of the terms of micro, small and medium-size enterprises • Summary of public subsidies available to promote SME development • Mechanism for interest reconciliation with the organisations of small entrepreneurs • Definition of jurisdiction of Enterprise Promotion Council.
The Government Subsidy Programme "Széchenyi Plan" (2001) • The Széchényi Plan was a wide range of non-returnable subsidy schemes for beneficiaries such as • Companies, • Local Governments • and civil organizations. • The subsidy schemes were grouped into 7 programmes, according to the aims to be supported. • One of these programmes was the Enterprise Promotion Programme, which contained an SME development Subprogramme.
The Széchenyi Enterprise Promotion Programme (2002) • After the elections of 2002, the new Government phased out the Széchenyi Plan and initiated a new, still operating policy under the umbrella name "Széchenyi Economic Development Programme". • Aim of the programme: To enhance the development and competitveness of micro-, small- and medium size enterprises. • While the Széchenyi Plan had focused on non-repayable assistance, the Széchenyi Enterprise Promotion Programme involves other measures as well, such as • co-ordinating the subsidy systems of the various autonomous ministries • tax breaks • and measures to decrease the administrative burden to SMEs. • Indicators: under the Széchenyi Enterprise Promotion Programme since 2004 • more than 100 individual subsidy schemes operate • and directly benefits more than 2000 SMEs per year.
Measures of the Széchenyi Enterprise Promotion Programme • Tax allowances: • Simplified tax for entrepreneurs was introduced as of 2003, • Health contribution rate was reduced, • Tax allowances to investments by micro and small enterprises were extended to intellectual products and the renewal/extension of real property, • Creation of company-level development fund has become tax-free. • Assistance to provide SMEs access to financial services and the capital market: • Special credit schemes, such as the Technology Catching-up Investment and Credit Programme • Interest subsidies • Guarantee commitments • Micro Credit Programme reformed • Széchenyi Card scheme to promote fixed assets financing. • Support SME investments of state owned venture capital societies.
Széchenyi Enterprise Development Programme EU-conform supported aims EU-conform procedures
Activities supported by the Széchenyi Enterprise Development Programme • Investment • Business services • Company-level Quality Policy • Education and training • Information provision • Consultancy • Networking organization
Individual subsidy titles of the Széchenyi Enterprise Development Programme • Technology development of manufacturing SMEs. • Developing SMEs’ entrepreneurial culture: supported consultancy fee. • Introducing ISO 9000 quality assurance systems in SMEs. • Introducing manager information IT systems. • Training of employees of SMEs. • Networking of SMEs: subsidy for consultancy fee. • Internet webpage development. • Networking of SMEs
Subcontracting subsidy Aim: Developing relations between large and small enterprises in the fields of production, innovation and information. Supports purchase of equipment, development of real estate, IT development, licence purchasing. Total value of subsidies= 1,5 Bill HUF Individual subsidy: max. 10Mill HUF50% self financing
Support for financing SMEs Micro Credit Széchenyi Card Europa Credit Credit Guarantee Co. Agrarian Credit Foundation Guarantee Coopeations SME Financial Co. Hungarian Development Bank Equity Scheme Credit schemes Guarantee Schemes Development Equity
Segmented SME Credit Program Roma Program 500-700 thousand HUF max. 3 Mill. HUF for development Micro Credit Max. 5 Mill. HUF for Working Capital Széchenyi Card Max. 10 Mill HUF for development Supported Dev’t Credits Europa Credit 10-500 Mill. HUF
Europa Credit Program for Technological Investment Subsidized interest rate Total volume of disbursable credit: 120-150 Bill HUF Maturity: 4 to 15 years Grace period: 2 years Individual loan size: 10 to 1500 Mill. HUF Of which: 40 Bill HUF For SMEs Additional 1,3 % Interest rate subsidy Financing from own sources: min. 25% Individual loan size: 10 to 150 Mill. HUF
Investment stimulation concept "Smart Hungary" (2003) • In 2003, the Government introduced the so-called “Smart Hungary” medium-term investment stimulation programme. Target group: medium sized companies. • Goals: • ·to improve the investment climate, • ·to increase investments leading to higher added value instead of cheap out-processing work. • The Smart Hungary Concept includes • tax-type assistance schemes • tax breaks on investment depending on the amount invested and the jobs involved • gradual decrease of health contribution payment • direct subsidy schemes • other measures to improve the investment climate (simplifying official procedures)
Credit Guarantees for SMEs • There are various credit guarantee foundations and co-operatives providing guarantees for SMEs. • The largest credit guarantee organization is the Credit Guarantee Company (Hitelgarancia Rt., CGC), which was founded in December 1992. Owners: • ·Government of Hungary and its agencies • ·Commercial banks • ·Hungarian Foundation for Enterprise Promotion • ·Savings associations • ·Interest representing organisations • Operation: CGC assesses the creditworthiness of the SME and if the decision is positive, it issues a guarantee to the disbursing bank. The annual fee between 0.5% - 2 % of the guaranteed credit amount is to be paid by the SME.
Activity of the Credit Guarantee Company by firm size of beneficiaries
Training the SME sector to EU accession (since 2002) • Responsible: Ministry of Economy and Transport. • A manual entitled "Practical Information on the European Union for Small and Medium-size Entreprises" was prepared • A so-called "Uniform Training Package" was compiled jointly with the chambers, interest representation und trade organisations • Training programmes were held at 150 small regional centres by end-2003 • Sector- and profession-specific brochures were published on EU requirements/regulations
Support to regional clusters of enterprises • In Hungary a regional cluster is a Government-subsidized regional network of co-operating companies, SME-support institutions, local governments, trade associations and technology transfer institutions such as University departments or technology consulting firms. Clusters are as a rule not legal entities, have no legal forms (such as companies or associations). In 2004 there are some 20 clusters in the country. Cluster establishment and development projects are as a rule subsidized by funds • of the EU and • of the Hungarian Government.
Centres of Hungarian clusters Mátészalka Optomechatronic Cluster Central-Hungary Automotive Cluster University Cluster Pannon Thermal Cluster Quality Devlopment Cluster Pannon Automotive Cluster Hungarian Building Industry Cluster Saxon Export Cluster Central-Transdanubia Wood and Furniture Industry Cluster Great-Plain Thermal Cluster Pannon Fruit Cluster Papa Meat and Food Industry Cluster Great-Plain Economy-development Cluster Pannon Electronic Cluster Central-Transdanubia Electronic Cluster Pannon Wood and Furniture Industry Cluster Southern Great Plain Textile Industry Cluster Southern Great Plain Road-Construction Cluster Southern Great Plain Touristic Cluster Southern Great Plain Handicraft Cluster South-Transdanubia Regional Geothermic-Energy Development Cluster • Ministry of Economy and Transport, Innovation and Environmental Protection Department
Activities of cluster organizations • Training, transfer of know-how in order to become subcontractors, joint quality management, spreading information on European Union standards • Product family marketing • Regional marketing • Interest representation (competition to existing trade associations and to regional lobbies) • Web pages • Conferences, joint participation on fairs, organisation of business meetings • Preparation of Hungarian and European Union tender documents
Cluster Case Study: Pannon Automotive Industry Cluster (PANAC) Sectoral subcontracting network of the automotive industry in North West Hungary, established: December, 2000. Based on a network which was already supported by the government's former Subcontracting Development Programme (1995-2000) Members: ·12 multinational or foreign owned firms of the automotive industry e.g. Audi, Opel. ·46 smaller component manufacturers ·18 service providers, e.g. banks, consultancies, developers, traders, logistic companies etc. Aims ·Integrating multinationals in the Hungarian automotive sector, ·Network building, focus on „bridging function” between SMEs and the major companies in the industry.
Activities of PANAC Cluster Training, sharing of best-practices, spreading know how ·Seminars for active and potential subcontractors on needs of buyer companies ·Benchmarking Club: monthly programmes, events (Logistic Day, Technology Day) ·Internet: portal-site, mailing list. ·Surveying management and technological abilities of member firms. International relations ·Austrian-Hungarian business meetings, ·International Pannon Automotive Forum in Raab ·Compillation of Automotive Industry Dictionary in 3 languages,
Strengths of cluster support policies • ·Supporting networking instead of supporting individual firms, consequently support is less interventionistic than previous schemes • ·Clusters create frameworks for absorbing European Union subsidies • ·Support of clusters: a consequent continuation previous Hungarian subcontracting policy. Aim: to develop a wide stratum of SMEs, which are capable to serve the outsourcing needs of multinational companies in Hungary
Weaknesses of cluster support policies • Loosely, vaguely defined cluster concept • Lack of clear concepts about how to develop self-financing, sustainable clusters • Weak coupling between strategies of individual policy areas on the one side and cluster-supportin institutional structure on the other side • Support has an experimental character • Heavy overlaps between cluster subsidy and subsidy for other, better institutionalised support structures (industrial parks, incubation houses etc.) • Weak control and monitoring procedures • Fight for scarce subsidy resources between various institutionalised interest groups (regions, sectors, industrial parks etc.) • Some clusters become hotbeds of guild mentality, market protection ideologies (e.g. Chinese textile import)
PHARE's SME Development Programme • Objective: To promote employment and economic restructuring by developing the SME sector. • Delivery mechanism: The European Union granted significant funds through the MVA for individual projects. • Finances: Since 1990 to 2002 the PHARE programme of the European Union provided the SME promotion programme over EUR 80 million financing, supplemented by the Ministry of Economy and Transport as co-financier. • Types of programmes implemented by the Hungarian Foundation for Enterprise Promotion: • Building of supprt organization network • Consulting and training programmes • Financing programmes: micro credit, support programme for sports enterprises • International business meetings, events
National Phare SME Programmes in Hungary Components of the 1999 Program ·Micro Credit Scheme ·Non-repayable subsidies to LEAs, Incubator Houses Components of the 2000 Program ·Non-repayable support of co-operation between SMEs (Total: 9 m €) ·Support SMEs Human Resource Development by training (Total: 2,4 m €) Components of the 2001 Program: ·Electronic commerce for SMEs ( 4 m €, service tender) ·Non-repayable support to innovation activities of the SMEs of the South Great Plain (Total: 4 m € )
Hungarian Foundation for Enterprise Promotion and the Local Entrepreneurial Agencies (1990-up to this date) The HFEP was established in 1990 by the Hungarian Government, banks and interest representation organisations. In the same year the Commission of the European Union appointed MVA to implement PHARE's SME Development Programme (SME Programme). The headquarter of the Hungarian Foundation for Enterprise Promotion in Budapest, 2004