Discussion Papers 1994. No. 19.
Small and Medium-Sized Firms
and the Role of Private Industry in Hungary
CENTRE FOR REGIONAL STUDIES
OF HUNGARIAN ACADEMY OF SCIENCES
DISCUSSION PAPERS
No. 19
Small and medium-sized firms
and the role of private industry
in Hungary
by
HRUBI, Laszhi and KRAFTNE
SOMOGYI, Gabriella (eds.)
Series editor
HRUBI, Laszlo
Pecs
1994

Discussion Papers 1994. No. 19.
Small and Medium-Sized Firms
and the Role of Private Industry in Hungary
Prepared for the project of
„Small and medium-sized firms and the role of private industry in Hungary
and Poland: the case of consumer good industries"
Supported by
„Action for Co-operation in the Field of Economics"
of the European Union
Team of authors
Dr. Balogh, Sara, Janus Pannonius University, Pecs  (Chapter 4)
Dr. Belyacz,  Ivan, Janus Pannonius University, Pecs  (Chapter 1 and 2)
Dr. BenkJ,  Andras, Janus Pannonius University, Pecs  (Chapter 3)
Dr. Horvath, Gyula, Transdanubian Research Institute
of CRS HAS, Pecs  (Chapter 5)
Dr. Hrubi, Laszlo, Transdanubian Research Institute
of CRS HAS, Pecs  (Chapter 6 and 8)
Krafine Dr. Somogyi,  Gabriella, Transdanubian Research Institute
of CRS HAS, Pecs (Chapter 8)
Miatovics,  Csilla, Centre for Regional Studies of HAS  (Selected bibliography)
Nyakacska,  Maria, Baranya County Department of the
Central Statistical Office, Pecs  (Chapter 7)
Sziraki,  Zsuzsanna Centre for Regional Studies of HAS  (Selected bibliography)
ISSN 0238-2008
© 1994 by Centre for Regional Studies, Hungarian Academy of Sciences
Technical editor: Hrubi, Laszlo
Typeset by Centre for Regional Studies, HAS
Printed in Hungary by G—Nyomdasz Ltd., Pecs

Discussion Papers 1994. No. 19.
Small and Medium-Sized Firms
and the Role of Private Industry in Hungary
CONTENTS
PART ONE
ECONOMIC AND LEGAL FRAMEWORKS OF SMALL ENTERPRISES
IN HUNGARY /5
1  Preconditions for privatisation in Hungary /7
1.1 The question before Hungary /7
1.2 The results of early privatisation  /8
1.3 A revised privatisation program  /10
1.4  Conceptualisation of Hungarian privatisation program  ///
1.5 Individualisation — stage one  /13
1.6 Marketisation — stage two  /14
1.7 Anti-monopolisation — phase three  /15
1.8 Anti-inflationisation — phase four  /16
1.9 Corporatisation — phase five  /17
1.10 Privatisation — phase six  /19
1.11 Conclusion /20
2 Macropolicy and the development of small enterprises in Hungary (21)
2.1 Introduction  /21
2.2 A historical retrospect with lots of criticism  /22
2.3 Turn during the early years of the 1980s  /24
2.4 The total freedom of venture and the small enterprise  /27
2.5 About the importance of small enterprise's promotion  (31
2.6 The small enterprise as market competitive factor  /35
3 The legal framework concerning small and medium-sized enterprises /38
3.1 Introduction  /38
3.2 The business associations as the general forms of small and medium-
sized enterprises  /38
3.3 Co-operations as possible forms of small and medium-sized
enterprises /50
3.4 The common rules related to small and medium-sized enterprises  /53
Notes /56
4 National, regional and local institutional and financial system of
entrepreneurship promotion in Hungary /57
4.1 Organisation and efficiency of the institution system  /58
4.1.1 National institutions /58

Discussion Papers 1994. No. 19.
Small and Medium-Sized Firms
and the Role of Private Industry in Hungary
4.1.2 Directly supporting institutions  /61
4.1.3 Business federations  /62
4.1.4 National business development funds and agencies  /65
4.1.5 Entrepreneurs training supports  /66
4.1.6 Regional and local institutions  /67
4.2 The financing system of small and medium-sized enterprises  /69
4.2.1 Foreign credits /71
4.2.2 Domestic credit opportunities  /73
5  Entrepreneurship and regional policy in Hungary  /77
5.1  The regional dimensions of the crisis  /77
5.2 The development of the economic organisational system  /80
5.3 Enterprises immediately prior to the change of the political system  /82
5.4 The regional location and diffusion of new enterprises  /86
PART TWO
SMALL AND MEDIUM-SIZED ENTERPRISES IN BARANYA COUNTY /89
6 Regional structure and restructuring processes is Baranya county  /91
6.1 Regional economic structure of Baranya county: signs of depression  /92
6.2 A change in the function of regional development  /105
6.3 Restructuring: encouragement and initiation of new businesses
and local development /110
7 The development of organisational structure in Baranya county /113
7.1 Business organisations with legal personality  /114
7.2 Business organisations not having legal personality  /121
7.3 The regional distribution of business organisations  /123
Notes /127
8 Functioning of small and medium-sized enterprises in Baranya county
(Report on a survey)  /128
8.1 Results of the questionnaire's general section  /128
8.2 Characteristics and motivations of entrepreneurs  /135
8.3 Factors of production  /144
8.4 Products, markets, competitors  /150
8.5 Services and financial activities  /159
8.6 Perspectives, constraints and actions  /169
Selected bibliography /179

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
1 PRECONDITIONS FOR PRIVATISATION IN
HUNGARY
1.1 The question before Hungary
Politicians, executives, managers and other experts want to believe that pri-
vatisation can serve as a universal recipe providing favourable and rapid im-
provements to the Hungarian economy. We wish to clearly state that we don't
believe in any omnipotential ability for privatisation's capability to suddenly of-
fer the citizen's of Hungary all of what they have missed for two generations.
On the other hand, until privatisation has been substantially instituted, econo-
mic growth and the standard of living in Hungary will never achieve it's full
potential.
One vivid example is pointed-out by Marton Tardos,  advisor to the e-
conomically-liberal, opposition Free Democratic Party in Hungary. „What
we're proposing is the rapid privatisation of an entire economy. It's some-
thing unprecedented in size, speed and daring"  (Farlamb, D.,  1990). Hungary
embarked on an ambitious program to privatise even the largest firms as ra-
pidly as possible. But, the merits of this program are rather obvious with a
very limited rate of success, particularly with the large firms.
Two additional points are offered by bystanders.  Nankani,  an expert in
privatisation techniques states, ,,...but, the record of those nations that have
undertaken privatisation programs during the 1980's is quite mixed, and even
for the more successful ones, no blueprint for success emerges. Each privatisa-
tion seems to have it's own history and dynamics, arguing the need to adopt
a case-by-case approach rather than trying to formulate a simplified model..."
(Nankani, H.,  1990, p. 43). A second is offered by academics engaged in the-
oretical base-theory, „The primary goal is to conceptualise the arguments for
and against privatisation and to present a conceptual and strategic framework to
determine the propensity of a nation to privatise"  (Day, W. — Azmi, M.,  1990).
Yet, others insist that until privatisation is substantially completed, e-
conomic advantages will not result.
„Administratively set prices reflect political, not market needs."  (Menson,
Th.,  1992, p. 2). Even when a sensible market-decision is developed by govern-
ment administrators, when it has strong conflict with political goals, the best
market solution will be set-aside in favour of political acceptability.
Integrating these various viewpoints brings us to our basic presump-
tion that privatisation must not be considered as a uniform, inflexible goal.
In contrast, it must be approached as a means for restructuring an entire eco-
nomy to create viable business units. Historical experiences, in Europe and
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
the United States, remind us that many industries require stages of slow and
careful development, which should not be abridged for the sake of a goal of
rapid privatisation. We must not suffer under the impression that the exist-
ing firms, still operating in their outmoded socialist forms, can be success-
fully converted into healthy, privately-held firms in an instant.
The real situation actually prevents that from occurring. To begin with,
the deepest roots of an unsuccessful business operation require identification
prior to privatisation.
There is no logic to support the notion that the huge jump from an out-
moded, socialist, command-controlled, state owned company into a laissez-
faire, market-economy modern corporation would be successful if necessary
developmental interim steps are eliminated.
In the recent past, the Hungarian case for ownership rights, in the legal
sense, has been heavily emphasised. This paper will explore the question, „Is a
longer period of preparation necessary to eliminate the basic shortcomings of a
firm's operations."
1.2 The results of early privatisation
During the past three years, attempts at privatisation have demonstrated a wide
diversity in philosophy, expectations and results. The New Company Act
(1988) and The Transformation Act (1989) were issued under the old political
regime. Since 1989, several attempts were made vis-a-vis the so-called sponta-
neous privatisation process. Unfortunately, the deepest tensions and insolvency
of many large Hungarian firms were hidden by the politics of a central planned
economy. State subsidies, indirect and especially direct, have been reduced in
recent years. However, even The Hungarian Bankruptcy Law (1986) has had
only a minor result in insolvent businesses declaring bankruptcy.
During the uncertain political climate of 1989, several attempts at the so-
called „spontaneous privatisation" were undertaken. To understand this unique
phenomenon, a detailed explanation of prior political events is necessary. The
former Communist Hungarian Government introduced a new enterprise-ma-
nagement system in 1985. The objective of this reform was to separate the ma-
nagement function from state ownership and regulation. Essentially, all ma-
nagement authority (including that related to investment, organisation and
human resource management) was delegated to the firm's managers; away
from the government bureaucracy.
Although this appeared sound in principle, it frequently resulted in chaos
for many of the self-managed enterprises, especially those who had several
vertically-integrated subsidiaries or were horizontally diversified. This sudden
die legation (of management authority) provided the opportunity for manage-
8

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
ment to develop a position of strength against the government. These managers
(sometimes along with the employees) realised they now had an opportunity
to direct both financial and human resources vis-a-vis self-governing councils.
As they discovered their new-found power, these councils started to
transform themselves into holding companies, placing the assets of the former
company into newly created subsidiaries. The original firm was now only a
shell, with the assets transferred away from the head office of the state owned
firm. Many of these subsidiaries were subsequently re-constituted as joint-stock
companies; the ownership of the subsidiary now being shared with the manage-
ment, their relatives or sometimes the employees. The original firms became
known as „mailbox institutions."
There were some cases of spontaneous privatisation by the manager's
outright purchase of these newly created subsidiaries. Since the prices paid
to acquire these subsidiaries were ridiculously low, it amounted to confisca-
tion of capital. Even if the subsidiary was formed into a joint-stock compa-
ny, the price paid for the shares owned by the managers (or their relatives)
still amounted to confiscation.
Referring to this process, Laszlo Kecskes, then Deputy Head Ministry
of Justice stated, „The ruling managerial elite of the self-managed state-
owned enterprises demanded actions on creating the legal framework of direct
corporate transformation. The missing elements were provided by the Trans-
formation Act which came into force on July 1, 1989. The main point of the
Transformation Act is to facilitate complete managerial control over the priva-
tisation process. The Transformation Act declares that any transformation of
the, self-managed state-owned firms can be initiated only if the enterprise
council approves the transformation plan with a two-thirds majority vote.
This also means that any outside offer which is not acceptable to the enter-
prise council could be easily turned down" (Kecskes L., 1990, p. 4).
The end result of these subsequent legal changes was the creation of a
situation such that when top management wanted to become the real owner
of the company, spontaneous privatisation would occur without any legal
restraints or controls on the transaction.
During the second half of 1989, there were neither rules or nor guide-
lines for standards of minimum asset valuation, disclosure of operations, com-
petitive bidding or even the establishment of a minimum purchase price. In
short order, more than one hundred state-owned firms were spontaneously
privatised. It was politically and practically unthinkable to consider reversing
those situations, even in situations where the most unreasonable transactions
were consummated.
In some cases, enterprise councils sold-out to foreigners for the prom-
ise of large increases in executive compensation, perquisites or partial ow-
nership. The foreign buyers could afford to pay these costs when consider-
9

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
ing that Hungarian wage levels are so low as to be highly competitive when
exported to Western Europe or North America. The managers were motivat-
ed to cooperage with the foreign buyers since this would allow them to re-
tain their executive status. Neither party, executive or buyer, was consider-
ing the long-term financial health of the enterprise.
Accordingly, it became apparent with spontaneous privatisation that
management decentralisation without ownership reform yielded an unaccept-
able result. From this lesson, it became necessary to establish a system of cont-
rols to ensure societal influence over the property redistribution process. This
reform took place via a new control institution: the State Property Agency.
This agency was charged with the authority to monitor all privatisation trans-
actions and if necessary, block those which appeared inappropriate.
1.3 A revised privatisation program
The new, freely elected Hungarian Government declared in September, 1990 its
National Revival Program: part of this program is a comprehensive privatisation
program targeted for a 3-5 year time horizon. This new government is under
the pressure of the legacy of the unfavourable performance of the old political
and economic system. Its goals are to improve macroeconomic operation and
growth and reduce the high rates of unemployment and inflation. Unfortunately,
it inherited the legacy of high foreign debt and it's attendant debt service.
Strong criticism developed from the perception that many firms had been
privatised too cheaply (National Revival Program, 1990, p. 3). A new philoso-
phy for privatisation, however, suddenly appeared to provide the opportunity to
mitigate two problems: that of the former criticism as well as providing a means
for debt reduction. Ergo, privatisation emerged as a goal into itself for debt re-
duction (as well as being politically correct). The long term economic infra-
structure and the well being and improvement of enterprise performance were
now surrogated to a new goal of debt reduction.
Hungary embarked on a new, ambitious program to privatise business.
The final goal of this program declares that state ownership (currently about
90%) will continue in the majority until the mid-90's. At that point, the goal
is to reduce state ownership to about 40%.
This will be accomplished by three different procedures:
• state initiated privatisation,
• enterprise initiated privatisation, and
• entrepreneurial initiated privatisation.
State initiated privatisation will be executed in three phases. Under the
first phase, almost 40,000 small business-units in the areas of retail trade, con-
sumer services and catering trade must be privatised. The second phase of the
1 0

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
so-called „state privatisation program" included the privatisation of 20-30
firms. Those would have been firms with stable financial condition. The third
phase would have been the sale or lease of state owned small and medium-sized
firms.
This plan called for three-tour auctions each year during the, 1991-1993
period so that 150-200 large firms would be privatised each year during this
period. As a result, by the end of 1993, 500-600 large firms — about one-
third of the large state owned — would be built-down.
Enterprise initiated privatisation will be tailored to specific firms and con-
trolled by the State Property Agency. During the 1991-1993 period, 300-400
of these state owned firms should be privatised.
The third type of privatisation program would be an entrepreneurial-ini-
tiated version. Demand for the purchase of shares, or an entire firm, would
come from either Hungarian or foreign buyers. In this phase, privatisation
would be initiated by private investors, but the entire procedure would be
controlled by the state.
At present, Hungary has external debts of US $ 21 billion and internal
State debt of HUF 1300 billion (almost US $ 20 billion). The above privati-
sation process has the potential to achieve cash inflow to the government of
an estimated US $ 30 billion.
It is very important, however, to note the size of Hungary's internal finan-
cial resources is estimated at US $ 4 billion. This creates a huge disparity of ap-
proximately US $ 26 billion to complete the privatisation process. There is no
apparent solution to complete the process other than foreign financing or fo-
reign direct investment (F. D. I.). Either financing or F.D.I. suggests that some
85% of Hungary's economy would be controlled, or at a minimum, substantial-
ly influenced, by foreign interests: a much too high percentage far any country
to accept.
1.4 Conceptualisation of Hungarian privatisation program
These shortfalls require rethinking of a national program of privatisation. Fun-
damental political and social changes in Hungary have scrapped the old central
planned economy in order to achieve a market economic environment. The goal
is clear: a laissez-faire, market driven economy. Accepting this goal leaves the
remaining question as the means to the goal, which may or may not be rapid
and total privatisation.
We agree with Wappenhans views that institutional and behavioural
changes are needed. He also points out the „scale of reform is tremendous.
Stimulating private sector development, breaking up state owned monopolies,
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
closing non-viable units, restructuring the financial sector, introducing proper
accounting systems, dissemination of modern managerial expertise"  (Wappen-
hans, W.,  1990). We might add several other aims to facilitate the transforma-
tion: rebuilding the old-fashioned system of enterprise, improving economic
efficiency, revitalising the factors of production, enhancing competitiveness and
encouraging private interest.
We do not dispute that the critical factor is the ownership, since without
clear ownership rights, capital cannot move and resources can be reallocated
only marginally. Moreover, clear accountability of the management to its own-
ers is a critically important incentive for enhanced efficiency. This is confirmed
by another Eastern European overview, „A clear and durable definition of
property rights must be established to hold managers responsible for their
actions and enforce market discipline, as well as to reward success"  (Eastern
Europe. A Long Way to Prosperity,  1989/90).
The key question to all Eastern European reforms is to provide new func-
tions and rules, new forms and motivations, new identities and ambitions to
poorly-managed, low-performing firms and to the masses of people who are
existing without clearly defined motivations, self-enlightened interests and
role-responsibility for the success or failure of the outcome.
One approach is that of a long-term learning process for both business
enterprise and society as a whole. In conjunction, a long-term transition pe-
riod is also needed to develop and strengthen the new institutions and to dis-
seminate and assimilate new concepts. This societal and political acceptability
is unavoidably necessary if the new forms of enterprise are expected to endure.
A broad societal involvement is one of the most important conditions. A huge
difference can be recognised between the initial and final stage of this historic
reform process. The initial stage can be characterised by the lack of private in-
terest, initiatives and incentives, poorly developed market infrastructure and
operation, and low management efficiency. At the other extreme, the final stage
could operate a workable market system based on highly motivated entrepre-
neurial behaviour, high performance in company activities, ambition, motiva-
tion and enlightened self-interest in personal behaviour.
A rapid selling-out of shares will not eliminate shortcomings of a firm's
operation. We present a list of the necessary stages of development of the entire
economic restructuring process, knowing it is a formal hypotheses without for-
mal testing.
These stages can be summarised as follows:
• individualisation,
• marketisation,
• anti-monopolisation,
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
• anti-inflationisation,
• corporatisation,
• privatisation.
Each stage requires a careful and detailed analysis and justification in or-
der to precede to the subsequent stage.
1.5 Individualisation — stage one
Individualisation of economic actions appears as an elementary condition for
any kind of economic market transition. Under the command rules of a central
planned economy, private individuals are denied the freedom to determine eco-
nomic decisions. For that reason, a comprehensive rehabilitation process is
needed to restore the individual's decision-making capabilities as an informed
consumer, supplier, saver or entrepreneur. This first step on the way to econo-
mic reform is necessary to „activate" the individual into the reformed economic
and business functions.
Hungarian economic reforms began after the 1956 revolution, and since
1968, a new type of reform effort was expanded by the New Economic Mecha-
nism. This seemed the only successful way to improve the poorly-run centrally-
planned economic performance. Hungary's economic operation has become
substantially more flexible and rational in comparison with the pre-reform state
of affairs, but has remained far from an effective market economy. In the past
few years, the domestic supply of goods and services has improved. This is a
direct result of the business firm's reduced dependence upon state authorities
decisions.
Western experts express ambivalence concerning these reform efforts.
„Hungary has been quietly working toward more open markets for more than
two decades. The country has a national identity, a well educated population, a
viable farming sector and some tradition of a market economy. But industrial
reform, begun in 1968, has proven much less successful. Central planning was
progressively relaxed and firms were told to become self-supporting Hungary
has been a success story by Eastern standards for personal freedom and con-
sumer choice, but per-capita income remains below that in the poorest parts
of Western Europe, and only about average for Eastern Europe itself" (Eastern
Europe. A Long Way to Prosperity, 1989/90).
The 1968 reform did not result in substantial shifts in the private sec-
tors position. As a consequence of economic individualisation, the semi-pri-
vate sector proved to be much more successful since the early 80's. At this
time, all of the GDP-increase was generated by the private and semi-private
sector of the economy. The Hungarian subterranean economy has had a very
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
complicated structure, which includes real private activities and shadow (black)
market activities. Much of it consisted of part-time jobs in the areas of domestic
services; farming, small private service firms and retail sales. The amazing
aspect about this sector is that it owned about 5% of the production assets, but
generated one third of GDP. Because of this statistic, this sector was tolerated
by the pre-1989 government, but never officially accepted. Nevertheless, those
twenty years of reform, including the shadow market activities, have created a
basis for the Hungarian market-economy development.
1.6 Marketisation — stage two
The marketisation phase is closely related to the previously described indivi-
dualisation phase. It is a broad-based process which includes the efforts in
building (or re-building) market-related institutions, market infrastructure ele-
ments and re-orienting economic legislation and regulation.
Hungary's approach to establish a free market environment has concent-
rated upon the building of market-related institutions, but of course, this process
is not finished. As part of this market system foundation, Hungary created free
product markets and fairly free labour markets. During the course of financial
reform, an independent central bank was re-established along with banking in-
stitutions and financial instruments.
Hungary has reformed her tax system into Western-style taxation by in-
troducing a value added tax, personal income tax and uniform entrepreneurial
profit tax. The outmoded state planning bureaucracies were eliminated, private
firm starts are permitted and state subsidies (to a great extent) were eliminated.
The development of the legal framework has started. Hungarian Parlia-
ment passed several acts to promote deregulation of the economy and the deve-
lopment of a market-led economy. The two most important of them are: The
New Company Act created identical conditions for all forms of business, thus
facilitating further expansion and growth of small ventures; The Transforma-
tion Act facilitates the transformation of state owned companies into either a
joint stock company or corporate form.
In the area of international economic relations, Hungary liberalised nu-
merous aspects of foreign trade activities an addition to encouraging foreign
direct investment and joint-venture participation opportunities.
Despite these considerable institutional developments, Hungarian mar-
kets, in the broader sense, remain burdened by many distortions. Until the early
1990's, the marketisation process had not even been started. True competitive
markets, with many players, had not yet been realised, making a widening
and deepening of these newly established markets an unavoidable necessity.
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Criticism from Western economists cannot be ignored. Of course, these
markets retain many monopoly elements, state and collective enterprises, union
barriers and the like. Moreover, capital markets remain heavily controlled, with
only about 10% of enterprise capital raised on market terms even in Hungary:
„Partially freeing prices without creating a competitive environment and cont-
rolling enterprise spending is a prescription for stagflation, not for economic
growth" (Eastern Europe. A Long Way to Prosperity, 1989/90).
Small and medium size business start-ups are needed to strengthen the
Hungarian competitive market environment along with breaking-up some of
the large enterprises into smaller, better managed, more viable units.
There must be a proliferation of financial intermediaries to strengthen the
competition in the banking industry. This must include more foreign banks.
These new banking ventures are needed to heighten the competition by show-
ing how to recruit new clients and win new accounts, spurring the existing
Hungarian banks to a market orientation.
During the past two years, direct state subsidies to businesses have been
reduced. Despite the decrease of direct subsidies, indirect and hidden assistance
to the banking system continues. This significant aspect of restructuring is
stumbling along on it's way. The reduction or elimination of the redistribu-
tion role of the state budget would assist in elimination of distortions in the fi-
nancial markets. The result would be a more direct connection between con-
sumption and production.
1.7 Anti-monopolisation — phase three
Unfortunately, there is a high degree of monopolisation by the state owned
firms. Some dismantling of the large firms began as early as the 1980's, but this
move died soon after it was started. As a result of this break-up, 100 new firms
were created, but the vast majority of these monopolies remained intact. After
the Hungarian political changes by the initiatives of top managers, several trusts
and artificially integrated big firms and other medium level bureaucratic struc-
tures were transformed into property-management firms.
As emphasised in one of the author's former papers, „Our most im-
portant finding about the period of transition is that the demolition of bu-
reaucratic and market substituting structures is going very slowly, the busi-
ness venture attitude is a less characteristic factor, but the income sharing
endeavour seems to be the most typical feature" (Belyacz I., 1990).
In the near future these artificially created monopolistic firms must be eli-
minated by reorganisation, deregulation or import-export liberalisation. Compe-
tition policy must be given a concrete anti-monopolistic substance to eliminate
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
this legacy of a centrally planned economy. This will require breaking-up of
many vertically integrated industrial structures. A very complicated task since
supplier-customer relationships must become re-oriented to a market driven se-
lection process.
The government must work-out the sensitive and intricate legal prohi-
bition of unfair behaviour within the market. The main condition of free market
economic competition is the freedom and fairness of the competition. Breaking
down the command economy's monopolies by splitting them into smaller parts
offers the opportunity to stimulate the economy by increasing the number of
competitors in the market A similar positive effect could also be achieved by a
further liberalisation of the foreign trade sector.
Failure to accomplish this anti-monopolisation process would result in
one of the worst possible outcomes; privatisation without competition. This
unfortunate situation would result in higher costs and lower standards of quality
for goods and services.
The most obvious and straightforward method to accomplish anti-mo-
nopolisation is the closing of the bureaucratic centres of these large companies
and then splitting them apart. This process will need to consider both the verti-
cal and horizontal aspects of the monopoly. In the area of vertical integration,
production can be broken-away from the distribution function. There also exists
the opportunity to break-apart certain aspects of the production process, so long
as the break-up creates no additional in-efficiencies. On the other hand, dis-
mantling horizontally-related products or processes may be much more difficult
to accomplish without introducing reduced efficiencies into the economy. Ne-
vertheless, the anti-monopolisation phase will be characterised by smaller units
which can be better managed to be more efficient.
1.8 Anti-inflationisation — phase four
„Competitive markets must be created to set wages, prices, interest and ex-
change rates. Free prices without competitive markets and clearly defined rights
and obligations tend to produce inflation rather than higher productivity"  (East-
ern Europe. A Long Way to Prosperity,  1989/90).
Inflation can be measured in the marketplace. The economic risk rating of
Hungary is currently 104 out of 129 of the world's economies  (The Wall Street
Journal, September 20, 1991). This low level of world confidence results from
high (30— 40%) annual inflation rates which exist even prior to the privatisation
process. The successful fight against inflation will be the condition which estab-
lishes both foreign and domestic confidence in the privatisation process.
There are numerous potential inflationary forces present in Hungary. In
the absence of a viable anti-inflationisation program, these factors reinforce
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
each other, creating a powerful, geometrically-cumulative effect. The most im-
portant of these are: anxiety and anticipation (political uncertainty), macro-
economic dis-equilibrium (deficit budget), delays in accounts payable (eco-
nomic uncertainty), low productivity (inappropriate incentives), inadequate
influence of the market (inadequate rewards), domestic price rises to world-
class levels (elimination of subsidies), and the reduction of prices in former
monopolistic markets (competition).
The elimination of Hungarian double-digit inflation requires installation
of rigid disciplinary controls. This discipline begins with structural reforms in
budgetary and monetary policy at the State level. Where monopolies remain,
supervision of both prices and wages is unavoidable. If the state fails in this
task, the private sector will only be encouraged to follow suit. Other areas of
action include: a realistic exchange rate policy, a foreign trade policy which
stimulates competition, efficient utilisation of external resources, incentives for
private savings and development of private property.
1.9 Corporatisation — phase five
The final two stages, corporatisation and privatisation, both theoretically and
practically, must be separated from one another. Furthermore, it must be clear
that these two significant objectives must not be implemented simultaneously.
To begin with, even the old-style, state-owned companies must be trans-
formed into a modern corporation based upon the division of capital by regis-
tering a stated number of shares. This will provide a means for the raising of
additional capital, if needed in the future.
Belyacz argued, in a previously quoted paper, „In the present transitio-
nal situation, at least two serious controversies are involved. The first is the
unreconciable logical controversy between the corporate and self-managed
form of enterprises, and the other problems are difficulties of transforming
the state owned firms into corporate form related to their unprofitability and
ineffectiveness. The self-management model in the mid-80's caused many
confusions in the functioning of economic actors. (As it was mentioned ear-
lier) at least one half of the means of production was transferred into partial
enterprise property, and as a consequence of it, capital users have been auth-
orised with property rights. These misconceptions have to be cancelled, the
change of owners in unavoidable both state owned and self managed firms
have to be transformed into corporate form" (Belyacz I., 1990).
The most difficult question in the corporatisation process concerns the
issue of firms with operating losses. General business principles demand un-
profitable firms be merged or liquidated. At present, many Hungarian firms
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
cannot achieve profitability without direct subsidies or indirect forms of as-
sistance. This outcome is a result of many causes. Over recent decades, their
management practices are incompatible with an open market environment.
Most large Hungarian firms are overstuffed and undercapitalised, thus being
poorly managed and under-equipped. Successful corporatisation of these firms
will be one of the greatest challenges of the transition process.
In addition, the insolvency (or near insolvency) of many companies is an
equally challenging problem. Hundreds of companies reached this situation as a
result of the actions of less than fifty very large firms. As accounts receivable
(for payment of goods shipped to these few, very large firms) grew in propor-
tion, their size transcended the concept of accounts receivable and achieved
(in actuality) the status of debt. This debt amounted to HUF 150 billion in 1990,
an amount equal to more than half of short term credits extended by all the
banks to all the businesses. (Some estimates place the total closer to HUF 200
billion). In these cases, this debt should be classified as „non-performing" and
in most, as un-collectable.
This insolvency problem means that many companies cannot meet their
payment obligations in due course. Although this practice was abandoned only
recently, it had accumulated over years of state ownership in a command eco-
nomy. However, much of this insolvency is a symptom of more significant
problems: high cost levels, lack of competitiveness, and lack of adaptation to
changing market conditions.
Initially, these firms became insolvent intermittently; however, later, it
became permanent. Nevertheless, bankruptcy procedures were not started
against them (despite the existence of bankruptcy law) because of the pater-
nalism of the state's command economy. In addition, bankruptcy would be in-
terpreted as bad politics. Because these insolvent companies continued to ope-
rate, the large state-owned companies started to influence other sectors of the
economy. As a result, they received huge subsidies to cover their losses and en-
sure, not only their survival, but also the survival of their suppliers and other
related firms. In this manner, they „survived' and avoided bankruptcy for long
periods.
There are presently approximately 400 companies in this category. The
majority have not caused the problem, but are the victim of the circumstances,
having been caught-up by the large company syndrome. This large company
syndrome was brought about by several factors: lack of adapting to market con-
ditions, outdated production methods and state paternalistic politics.
The situation cannot be reversed by a more liberal credit policy; this
would simply perpetuate the cause of the problem. Although the companies
suffering from chronic insolvency are in the minority, the large company syn-
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
drome creates hundreds of subordinate insolvencies. Nevertheless, this syn-
drome devastates the total payments system and consequently, the circulation of
both money and goods. As a result, bankruptcy does not become a threat, since
it is not considered a reality.
Today, it is generally accepted that the chronic accounts payable prob-
lem can only be settled by implementing a consistent bankruptcy procedure,
not by further delaying measures. In addition, this procedure must be imple-
mented simultaneously by all effected companies, not sequentially, so that the
initial firms accept all the suffering and the latter firms are declared solvent.
A privatisation process alone is not a panacea for all of these problems of
profitability. It will take some time to strengthen and develop unprofitable
firms in Hungary, just as it does in other parts of the world. It is primarily for
this reason that corporatisation and privatisation must not be mixed in time or
space, but rather, must be approached sequentially. Prior to privatisation, the
new Hungarian Corporation must demonstrate it's capability to be successful,
keep its promises and fulfil its obligations to suppliers, lenders and employees.
Until success is apparent in these elements of the business process, privatisation
is premature, since investor confidence will only be achieved by these succes-
ses. Many large Hungarian firms will not be successfully corporisated with their
overmanned, poorly managed, unprofitable operations; restructuring will be re-
quired. Dissemination of education and training must be part of the process.
1.10 Privatisation
phase six
—
As shown in this conceptual framework, privatisation can be regarded as only
the final phase of a more complete transitional process. Successful privatisation
cannot be implemented without: motivated individuals, a developed market in-
frastructure, abandoning the rules of artificially created monopolies, controls on
inflation and well managed corporatisation. The preconditions to privatisation
must be completed satisfactorily. Simply selling-out previously state owned
firms to private owners, legal entities or institutional investors would not yield
good results because this form of privatisation would not solve the short-
comings and inadequacies that currently exist.
Thus far, the one-sided legal transformation aspects of Hungarian pri-
vatisation have been overemphasised to the detriment of the total process. A
broad and rapidly implemented privatisation would cause many conflicts. In
the short run, the lack of domestic capital would result in a majority of foreign
ownership of most Hungarian firms. Only Western investors have the finan-
cial strength to buy Hungarian companies at privatisation auctions. If this were
to occur, it would not represent the best interests of suppliers, employees, custo-
mers, lenders and the citizens of the country.
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To establish a sound basis for successful privatisation, potential new
owners and shareholders must be developed. Decentralisation of the social in-
surance fund and pension funds is needed to create financial sources. Insu-
rance companies, broker agencies, investment companies, mutual funds, and
other institutional investors will be needed to develop the financial market;
infrastructure. The existing Stock Exchange has few transactions, poor trade
and a lack of offers. As a result, current prices cannot be considered as real mar-
ket prices. As is the case with other markets, the capital market also needs
widening and deepening to be effective in a successful privatisation process.
1.11 Conclusion
If there is a failure to perform these time-phased-steps to establish the precon-
ditions for privatisation, the process will be only a legal transformation, lacking
the reform of the infrastructure necessary for long term business success in
Hungary. Our final conclusion is that privatisation cannot be accomplished in
one giant-jump from the outmoded, socialist type of state owned company into
a market-led, efficient, privately owned economy.
There are no short-cuts. This long (and careful) transition must be imple-
mented to achieve quality and success in Hungary's nation-wide privatisation
process.
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Discussion Papers, No. 19.
2 MACROPOLICY AND THE DEVELOPMENT OF
SMALL ENTERPRISES IN HUNGARY
2.1 Introduction
Despite the appearance there are many unforseeable difficulties in examining
the position of small and medium-sized enterprises in the national economy.
Probably the classification of small, medium-sized and large-scale enterprise in
the developed market economies are made according to other criteria and with a
different result than in our economy. The fundamental reason for the diversity
is the existing difference in productivity. If we want to oversimplify the illustra-
tion, it can be said that there is a slip of category in favour of the enterprises of
developed economies.
Those named small enterprises there correspond to the medium-sized
firms in our case. The differences of output per capita, number of employees,
and the technological equipment, all play a role in causing the divergence. De-
spite the measuring problems the subject and the message of this study are
clear-cut since the terminological differentiation of small enterprises has been
clear and beyond question in the Hungarian economic literature for long time.
In order to simplify the elaboration we would analyse the business units
by drawing them into one circle, and name them by the collective name of small
enterprise. We wish to emphasise in the introduction, however, that in reality  it
includes the examination of three different firm sizes. We include to this circle
the private or family businesses operating with one or very few employees,  in
most of the cases they are not legal entities; secondly we class the small firms
working with maximum 50 employees as small enterprises, and thirdly smaller
medium-sized firms operating with a few hundreds of employees. During the
analysis we will not make a difference between the three groups, and use the
collective name of small enterprise for indicating all of them.
In accordance with the request, the analysis covers more than a quarter of
a  century, in order to understand and to solve the problem of small enterprises
we need to go back to the beginning and the middle years of the 1960s. In order
to show the importance and the role plaid by the small enterprises we will not
break the above mentioned phase into sharply separated internal periods rather
we will refer to the most important turn points with a greater emphasis. In the
centre of the train of thoughts we examine the growth opportunities of small
enterprises in the light of the endeavours of the prevailing economic policy at
the given time. In the course of this we are bound to qualify both the possibili-
ties of self development and the effects of the economic policy. By the subject's
nature we need to put greater emphasis on the critical analysis of small enter-
prise's self-development.
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During the last three years explosion-like changes are witnessed with
respect to all aspects of small enterprise's economy. It, however, should not
hinder us in making a balanced, impartial analysis of the problems, since it does
not seem feasible to flash back the current conditions to the past.
By doing that the opinions about the processes of the past would be
bound to become distorted. The other reason for great caution is that the results
of the series of explosion-like changes have not yet become consolidated, there
are still significant changes ahead of us in the entrepreneurial sector.
From numerous signs we can come to the conclusion that the spectacular
quantity growth has not accompanied by a quality breakthrough beyond doubt,
that is enough reason for a circumspect judgement.
2.2 A historical retrospect with lots of criticism
The political and social changes taken place on the turn of the last decade gave
a devastating judgement on the economic system, whose leaders never treated
the small enterprises as an equal factor. The command economic system most
favoured company formation was the large factory, its existence was consi-
dered extremely important and backed up by political and economic arguments.
The political power treated the small enterprises in an off-hand manner, and
it feared from it as an autonomous proprietary and operating formation. The
ambivalent relation of the politics was coloured by the political practice that
talked about the importance of small enterprise on phraseological level, and in
reality it did everything to hold it back.
At the end of the 1940s after the nationalisation and following the intro-
duction of the command economic system the destiny of small enterprises was
sealed. The pushing of the large factories overshadowing all the other company
forms was based partly on the euphoric overemphasis of the advantages of
magnitude, and partly on holding back the private ownership, and initiatives
even by prohibition. The fact that the domestic company structure before World
War II was not rational in an economic sense worsened the harmful effects of
this doctrinaire idea. The two extreme poles of the structure with respect to size
(the one-man family-like industry and trade, and the large company) were real-
ly developed. At the end of the 1940s such a size distribution of companies
was politically attacked and run down by a wave of termination and merger that
included only feeble small and medium-sized enterprises. Only a few hundreds
of enterprises existed, and more than half of it was merged in within a couple of
years. A counter process could be witnessed in this obviously hostile environ-
ment for small enterprises: by forcing the individual craftsmen and retail dealers
into co-operatives practically they become part of the small enterprise circle.
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The attack against the entrepreneurial small existence, the mergers of nu-
merous firms belonging to the circle of small and medium-sized enterprises turn
the pyramid of the companies' size distribution upside down and by that its
small business foundation has excessively been weakened. By the years of '50s
the prevailing form in the size distribution of companies will be the large com-
pany. The proportions can be well demonstrated by indicating that in all the sec-
tors of the national economy the few thousands of large companies stood a-
gainst only a few hundreds of small firms. This extremely distorted company
structure was devoid of any kind of economic rationality, and only the easier
way (central) of manageability could be argued in favour of the repeated waves
of mergers.
Despite the government's peremptory hostility to small enterprises the
claim of smaller sized economic units comes to the front from time to time and
the developments following the 1956 revolution give a good example of it. To
permit and tolerate small enterprises in small-scale industry and commerce
appeared as a compulsive demand. During the last third of 1950s licences for
craftsmen and retail dealers are given in great quantity, simultaneously the
forced collectivisation sweeps over agriculture gathering hundreds of thousands
of small existence into big farms.
The company mergers of the early '60s proved more than anything else
how much the formation of the size distribution of companies was governed by
political infatuation. From the beginning of the decade the reform forces of the
political power concern themselves in radical transformation of the structure of
economic policy, meanwhile a centralising wave sweeps over the company
structure with a strength exceeding all the previous ones. By the middle of the
decade the rest of the small and medium-sized enterprises has been merged in
and the country reaches the threshold of the reform in 1968 with a number of
state-owned small firms not exceeding 50. This totally centralised company
structure is incapable of being the base for a competitive market economy.
The structural reform of the economic policy in 1968 was a milestone in
shaping the conditions of small enterprises from all aspects. The reform's ideo-
logy emphasised the principled importance of private initiatives, flexible com-
pliance, decrease of production costs, and the small enterprises in general, but it
did not draw the institutional conclusions from it. Since the policy system did
not change anything about the ownership structure of the given time, thus no
possibility existed for mass foundations of small enterprises based on private
ownership. Not much after the beginning of the reform the company organisa-
tion system is supervised, and it is found „in perfect trim". Obviously the con-
clusion could be drawn from it, that to form a company structure with many
participants according to the requirements of a competitive market is not in the
interest of the political power.
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Despite that the reform of the economic policy did not start a wave of or-
ganisational decentralisation, and did not take the initiative in founding new
small enterprises, it did make a breach in the exclusive power of the large com-
panies. Following this we could witness such processes that in some way con-
tributed to the collapse of the command economic system.
After the reform in 1968 the advantages of small enterprises capable of
flexible compliance over large companies became clear, it was obvious that to
satisfy effectively the market demands without a developed small entrepre-
neurial sector was inconceivable, it turned out that the smaller sized firms a-
dapted much faster to the circumstances followed the reform than the large
companies. We could not hear voices of the ideology and political phraseology
against small enterprises from there on, the hidden political endeavours, how-
ever, hampered the development of this sector.
A peculiar struggle started in which the small enterprises gained and lost
at the same time. It was a gain that the number of craftsmen and retail dealers
had definitely grown, new co-operatives were founded, the ancillary branches
of large scale farms actually functioned as hidden small scale plants.
Naturally the political attack against the reform did not leave the size
distribution of companies untouched. Beside emphasising the 50 largest indus-
trial companies almost an individual company preference was realised by one-
sidedly allocating resources to them. In the middle of the 1970s the last wave of
organisational centralisation of the command economic regime swept over, by
merging dozens of co-operatives in the organisations of large companies.
The above mentioned demonstrates well that the politics and economic
policy, treating the small enterprises in a discriminating way, could prevail for
three decades from the end of the 1940s. The prohibition with respect to owner-
ship barred the foundation of small private enterprises, and the existing state and
co-operative small firms did not receive national economic resources. By the
first half of the 1980s one-sided preference of the large companies reached a
point where the supervision of the long lasting discrimination became unavoid-
able. The turn happened around the time when the large company system be-
came entirely incapable of producing significant surplus value.
2.3 Turn during the early years of the 1980s
The growth crises evolving since the end of the 1970s evoked a reaction of eco-
nomic policy makers that stood out in sharp contrast to their previous ones. In
the beginning of the 1980s after several decades of one-sided organisational
centralisation the organisational decentralisation of more than 200 companies
was scheduled. 2-3 years passed and the promising decentralisation wave
broke and the originally planned of setting independent company units up af-
fected only one-tenth of them. Thus radical changes could not happen, how-
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
ever, more than a hundred new small and medium-sized firms came to exis-
tence, and the change in attitude was even more important after a merging in
campaign lasted for decades the previously merger units were rendered inde-
pendence for the first time. Beside the organisational decentralisation that
affected most of the large companies, similarly important processes started to
increase the role of small enterprises.
In the beginning and the middle of the 1980s the state economic policy
itself helped to remove the barriers by permitting and in some way support-
ing the foundations of work partnerships in enterprises (pursuant to Decree
28/1981. (IX. 9.) MT), small co-operatives, civil law associations and other
forms of small business organisations. The most fundamental mover of the
just started permission and incitement of small enterprises was that the poli-
tical power could not defend itself against the growing losses of the large
company system. The legal, semi-legal and illegal small enterprises became
increasingly important sources of the national economic output. The power
overlooked the contravention of regulations by private initiatives since this
sector produced one-third of the gross domestic product before the years of
the political change of regime.
The small business prosperity of the 1980s was characterised by the
followings: hundreds of embarking on business managed their business with a
relatively small capital, in part-time job (half time or quarter time), entwined
with the large companies of the state sector. These small ventures were not bu-
siness organisations in an economic sense since most of them never paid taxes,
did not undertake any risk, produced for a secured market, and several of their
formations lived in an actual symbiosis with the large companies. The political
power took care not to let the small businesses independent, capable of accu-
mulating, and expanding also to become well provided with solid capital. Most
of these small ventures could not be privately owned, since according to the law
only durable consumer goods were allowed to be kept as personal property.
The hundreds of small ventures of the 1980s were economic organisa-
tions tolerated of necessity, without a long term perspective of development
and accumulation, they were more interested in running through their incomes
than investing them or expanding the business.
The small enterprises constituting the grey economy of the 1980s mitigat-
ed the crises of the command economic regime, and demonstrated that the small
organisations capable of flexible compliance were more effective than the over
favoured and over subsidised large companies. By this time the indispensability
of small ventures and irreplaceability of a dual system with respect to size were
more widely realised. The large companies and the small enterprises instead of
excluding each other, they are interdependent and conditional upon one another,
necessarily built on each other. Though the discrimination against small enter-
prises is still loosened with difficulty within the company structure. For decades
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
the decisive part of financial resources was granted to the large companies, thus
the most significant characteristic of the small ventures was the scarce capital.
The political tolerance towards small ventures did not mean financial promo-
tion as well, so this business form reached the change of regime with possess-
ing only a fragment of the national economic resources.
It needs to be emphasised that in the above mentioned period the political
power made a concession out of necessity for using the large companies' capital
within the framework of small ventures. Several aspects, both legal and econo-
mic, of this peculiar co-operation also its ethics were not made clear, the na-
tional economic reserving and preserving role justified the compromise. De-
spite all the contradictions the small business development proved to be a
learning process, and it was an effective precedent of the real capitalisation
process taken place later. At about a thousand new small co-operatives were
founded and they infiltrated into the economy as real market economic organi-
sations; one-third of the retail shops and restaurants and other places of catering
industry began to operate under contractual agreements; communities were
formed within the large companies that could be seen as small venture's initia-
tives. These movements more and more plainly set against the large company
system wrestling with the increasing, difficulties of efficiency, but the break-
down of the large companies had not yet happen.
In the 1980s according to rough estimation the expanding small business
sector of the national economy produced an output equal to the loss of large
companies, thus the steadily increasing small business sphere could counterba-
lance the large companies' deficit, more over it established a minimal growth.
Based on contemporary estimations at about half a million people worked
in industry or service industry in some way, in small businesses (private, semi-
private or within the state sector), and in agriculture at about one and a half
million households worked on household plots. The contemporary analyses
emphasised more often that the small enterprises with a few percentages of
national economic resources produced one-third of the national output. It was
rather the criticism of large company system than the promotion of the small
business sector, since it was well known, that the tolerated small ventures were
based on self-exploitation of the participants and existed within chaotic legal
conditions, without the acceptance of private ownership, thus in insecurity.
The turn of the 1980s brought irrevocable results, after the changes there
was no chance to restore the organisational system based on the prevalence of
large company structure. At the threshold of the political changes more than
half of the population being in working age had relation with some organisa-
tional form of small venture. It seemed that according to all indications there
was a straight and short way to a well operating market economic system from
the evolved pre-school of market economy. It did not happen quite like that.
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
2.4 The total freedom of venture and the small enterprise
Following the free elections the new political forces in power did not consider
the small business reform experiments as the means for preparing the market
economic system, they wanted to establish a normal, guaranteed legal environ-
ment by formulating a new legal system. They made way for founding and
transforming companies in accordance with the laws by eliminating all the
barriers of free venture, by the statutory guarantee of inviolability of private
property, and ensuring sector neutrality. As a result of the new political and
legal situation the problem of maintaining the small business sector against the
political will lost its meaning, and the political differentiation between small en-
terprise and large company entirely disappeared after a long time. Following the
changes the small business organisational formations of the 1980s have gra-
dually disappeared, however, the semi-business and not business-like attitude
established then has not. The most obvious signs of it are demonstrated by the
significant decline of tax moral.
At the turn of the 1980s and 1990 there was a radical change in the small
business sector in a quantitative sense. Considering the number of enterprises
within the space of two years the pyramid of firm distribution was turned
over from its head to its feet, and its internal structure could be compared to the
companies' size distribution of the developed economies. During the dramatic
changes the number of individual small ventures (of the former craftsmen and
retail dealers) not having legal personality increased to six hundred thousands,
at about ten thousand small enterprises with legal personality were founded in
industry, about forty thousand in commerce and service industry. Based on the
number of small enterprises the small business sector became the prevailing for-
mation of the national economic company structure, and according to rough
estimations in the beginning of the 1990s these enterprises produced more than
one-third of the national economic output. The direction and proportion of the
previous pyramid of firms' distribution was reasonable changed by the quickly
passed off small business revolution. It is obvious that for such a big mass of
company foundation free capital could not be available, thus most of the new
enterprises were formed either with a minimal capital or with property goods
and capital resources derived from the large companies. By regulating the legal
status of business enterprises the semi-market and semi-business conditions dis-
appeared. The managers and employees of small enterprises worked in full-
time, under competitive market conditions, they became tax payers, and under-
took business risks. The first step of the new government's economic policy
to legitimate the small enterprises as an equal form was to declare the sector
neutrality. Actually there was no positive discrimination aiming at one-sidedly
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Discussion Papers, No. 19.
supporting the small enterprises. The most general means, the means of tax
policy affected all the business forms in the same way.
Some peculiar feature of the small business boom requires special at-
tention to be paid. It is a striking fact, that most of the business foundations
happened, both in relative and absolute sense, in the fastest capital turnover
ensuring sectors. This is the reason for that the majority of small firms, stabil-
ised in a short time, were formed in commerce and in service industry (ma-
terial and non material). It would be difficult to classify the mass of newly
founded small ventures by only a few characteristics, some tendencies, how-
ever, are well outlined after such a short time, too. Probably significant pro-
portion of the small enterprises was founded with the objectives to secure em-
ployment for the entrepreneurs and employees, to provide gainful employ-
ment and a consumption level above average, in addition to get a chance to
realise business entrepreneurial ambitions. With a slight simplification we could
say that the about one million citizens form the core of the existing small
businesses who played an initiative role in the semi-legal, tolerated small ven-
tures of the 1980s. The full-time entrepreneurs can enjoy all the advantages
and bear the burdens of business ventures within the new, legal framework of
small enterprise.
It may be very important to clarify that what role was played by the
autonomous forces of the economy, and by the economic policy, in the de-
velopment of small business in the past three or four years. Without the in-
tention to abolish the positive results of governmental policy, it is very like-
ly that the major role was played by the initiative of economic actors. In the
one or two years preceding the change of the political system the obstacles
of independent private ventures were gradually eliminated. The change of
system considerably reduced the weight of economic policy as the means of
government compared to the previous period. The remaining governmental
means became more unanimous and more transparent than the former ones.
The main point is rather that the considerations of economic policy have no
longer been obstacles to small business initiative, and the political barriers
have disappeared once for all. The source of troubles is that the disappear-
ance of obstacles and barriers alone does not mean automatically incentives
and support. The ten and hundred thousands of new small business firms
were established not by major entrepreneurs with solid capital but by econ-
omic actors with little capital. The shortage of available liquid capital reso-
urces is a serious difficulty just like it was in the past decades.
With strongly simplifying the recent development it can be argued that
the citizens who endeavoured to be entrepreneurs „escaped into" the framework
of small business. In this process the exemption of profit tax meant a definite
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
attractive element. Exemption from one kind of tax, however, did not mean
light burdens and a unanimously entrepreneurship supporting environment. The
long time well known burdens on the domestic production have not decreased
significantly; regarding the payments after labour and employment, social secu-
rity expenditures, various special taxes and fees, that is, all expenditures that a
small business has to bear in any circumstances, even when the output is very
low. The same costs that mean a relative small load for large enterprises are un-
bearable pressure on a starting small business in the stage of market intro-
duction.
Within the problems of small business firms financing is of outstanding
importance. No doubt about that the government and certain specified organisa-
tions and foundations took some steps to make favourable loans and credits
available, however, the total volume of these remained so small that it could not
have serious effect on a wide range of small firms. The conditions of ordinary
bank loans are so hard that the majority of small firms cannot even come into
consideration as potential partners for lending. Under these circumstances the
small entrepreneur can obtain resources of neither the capital market nor the
banks, and in this way the shortage of resources hinders the development of
small business units. The government, according to traditional routines, has pri-
marily established organisations and bureaucratic institutions that help enter-
prise development; and did not bring new financial institutions into life that
could have served small business development.
With a little overstatement it could be argued that hundreds of thousands
of small private ventures and tens of thousands of small firms with legal perso-
nality were born hoping the future support of economic policy, but did not re-
ceive really substantial assistance to their survival and development. The over-
whelming majority of new firms was established in the form of small enter-
prises because the minimum required initial capital meant the upper limit of the
financing capability of their founders. Most of the new small business firms
began to operate on a very unstable financial basis, and they were hardly able to
take on a significant load. It is a serious danger that a considerable number of
small firms will financially overload themselves and this would mean a chain of
crisis for thousands of enterprises. Because of the uncertainty of the market, the
counter interests of banks, the unstable position of large enterprises, there can
hardly be found a solid base that could offer support for small firms either in the
market or in the financial sense. The economic policy of the government is not
able to offer assurance that could mean support, in long term, to small business
ventures that endeavour to establish themselves firmly in a straight way.
Currently it could be hardly doubted that small business is the most
dynamic area of the national economy. The most intensive mobility, and the
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
actually progressive development can be observed in this area. However, while
pointing out that these movements have not yet calmed down, it must be re-
membered that in this spectacular whirling there are several thousands of
firms present, which have little chance for lasting survival.
The field of small business is extremely heterogeneous regarding the
involved attitudes and motivations. There can be found a lot of such types of
entrepreneurs whose primary objective is not smooth operation, decent profit,
market reputation, but the utilisation of the boom of entrepreneurship. It can be
worrying that numerous small firms do not undertake a continuous real econo-
mic operation satisfying market needs beyond illegally reclaiming value added
tax, using tax allowances, legalising illegally obtained productive assets. Per-
haps, there are much more shadow, sleeping, and pseudo-enterprises than it
would be unavoidable.
The long time anticipated revolution of small enterprises came true in a
period when business morale had dropped to a very low point, for unclear
reasons from many aspects. In the circumstances of developed market economy
the small business is a solid basis of the pyramid of the size distribution of
enterprises. They represent the largest number, but they cannot turn to be a
determinant power regarding output or capital, neither alone nor together. In
spite of their small size and moderate capacity, small firms are the symbols
of flexibility, rapid adaptation, and reliability. Although it is always the small
enterprise that has the highest mortality rate, this segment of size has been
representing a constant ratio within the totality of business for a long time.
Since the Hungarian pyramid of the size distribution of firms has turned round
extremely fast, it is a well-grounded question that whether this suddenly es-
tablished base of the pyramid will be solid enough. After many decades of
severe policy restraints the size structure of business was restored so sudden
that serious doubts may emerge regarding the fast stabilisation of it.
When talking about business, contractual, tax and morale confusion and
their crisis the chain of phenomena includes small enterprises, too. There must
be a reason for that the most positive morals of market economy and business
did not really established in the small business sphere. The fear from risk, bank-
ruptcy, market impossibility does not function as a retarding force in due mea-
sure and create dependency in a positive sense. We can find several business
units among the new small ventures that stand out rather by irresponsibility
and perfidy than by their promises and fulfilment of obligations. Before anyone
started to wonder why it is that we attach such an importance to these moral
problems, it must be seen, that because of the statutory gaps, and the less de-
veloped business ethics, small business might become such a hunting field,
where the misuse of business confidence and good faith, also the tolerance of
the society might happen without any consequence.
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All of these shows that we do not find the spectacular growth in the
number of small firms as events free from difficulties.
The impressive quantity does not mean a quality jump beyond doubt.
Everything that happened can rather be considered as an answer reaction aiming
at pressing the previous back, than an organic evolution. During a transit period
small enterprises must become part of the comprehensive division of labour of
macro economy, and assume the typical roles and features characterising this
business form. In all sector of the national economy the small sized ventures
have special features and functions. Obviously two-three years were not enough
for developing an organic co-operation between small enterprises and large
firms. The significant instability of the producing, market and financing posi-
tion of the large enterprises is only one reason of that, there was not enough for
the small ventures to find effectively their way either. Beside the stabilisation of
the large companies the target orientation of small firms would be needed for
an effective co-operation between enterprises of different size.
2.5 About the importance of small enterprise's promotion
The government and the parliament made significant steps to reinforce the
sphere of small enterprises by creating the legal framework during the last
years. The Act on Business Associations (Companies Act) was passed before
the political change of regime. The most preferred business forms by small bu-
sinesses are the limited partnership (beteti tarsasag) and the limited liability
company (korlatolt feleNssegii tarsasag). The number of small shops managed
by individual entrepreneurs increased above half a million. The scope of the Act
on Business Associations does not extend to their foundation. The striking cha-
racteristic of the new foundations is that while only some hundreds of busi-
nesses were created according to the simplest business form (partnership, kozke-
reseti tarsasag, kkt) included in the Companies Act, during the last three years
25 thousand of limited partnerships and at about 50 thousand limited liability
companies were established. The partnership and limited partnership based on
the principle of liability without limitation are in harmony with the size of the
firm, its capital, risk. The same, however, cannot be said about the limited liabi-
lity companies established in a great number.
A significant proportion of the limited liability companies, founded
during the last years, was formed with minimal capital.
Lots of them are one-man companies (formed by one member) thus there
are too many of those limited liability companies where the unlimited liability
would have been better. Obviously the basic problem is the measure of risk, lia-
bility and load bearing capability. Since most of the limited liability companies'
objective is not to join capital but activities, there is no reason for limiting liabi-
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Discussion Papers, No. 19.
lity and it is not understandable either. We only pay attention to this form
choosing confusion because by this way several firms can be founded aiming at
not functioning as a small enterprise but rather with an objective of border on
legal and illegal speculations. If thousands of business units are formed with an
objective of not producing goods to the market but rather for prime capital
manipulation, the doubt arises whether the influence of legal framework on
entrepreneurial scope is fortunate.
In an economy where the discipline of payments has got loose to an ex-
treme and in order to avoid the fulfilment of obligations the prime capital can
be moved to another venture of the owners-top executives with impunity, there
the efficiency of legal regulations is of special importance. By mentioning these
negative examples we do not wish other than to draw the attention to the fact
that these ventures can in no way reinforce the establishment of the size distri-
bution of firms.
If as a result of the radical boom of small enterprises a great number of
dubious small firms come to existence, it is to be feared that small ventures will
be accompanied by not desirable associations. The peculiar looseness created
by the organisational forms that can be chosen from, cannot be considered the
positive example of small business development without criticism. Despite the
appearance, we do not think that the economic policy makers and leaders have
done everything in order to help small ventures by creating a loose organisa-
tional framework.
The financial basis of business enterprises formed not for market produc-
tion and service output will be destroyed at the moment when it becomes im-
possible to live by taking advantages of tax allowances, the short-term exploita-
tion of capital, and manipulation. Unfortunately the small business boom made
way for such entrepreneurial behaviour patterns that do not serve the long term
interest of the national economy.
We should not forget that during the last three years the small firms with
legal personality were not founded by risking their own capital resources, but
decisively by the conversion of the pieces of public property. Under these cir-
cumstances we should not be surprised that the new owners and top executives
do not always manage the easily obtained entrepreneurial capital with the care a
conscientious businessman uses, but rather use it for prestige consumption. The
market economic attitude does not include these behaviour patterns, it is rather
a late appearance of „the soft budget constraints". In this light it would be more
correct to speak about some kind of over preference, and admit that the small
business form is over supported. Obviously this conclusion is in a contradiction
with the above mentioned, thus it needs some explanation.
The lack of small business promotion and the formal legal over support
of them exist together in a way, that the small enterprises functioning in the real
economy are lacking the promotion and at the same time the scope of business
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units with a dubious background and objectives is unreasonable big. The
owners and top executives of small firms formed for product and service output
can count on low percentage of net profit, and significant burden, too, which
keep the firm's realised return low. The economic policy makers have not
realised yet that the load bearing capability of the small firm is significantly
lower than of a large company, and the small enterprises cannot be levied a
contribution on to fill up the state budget without disastrous consequences.
The domestic practice demonstrates that in a relative sense the small enter-
prises do not bear less burden than the large companies. The most important
characteristic of the small enterprise is that its result is based either on private
work or the joint activity of small community, thus ab ovo it means limited
profitability and load bearing capability. The owners and top executives of
these enterprises (with scarce capital) are aware of the constraints, and adjust
the measure of their undertaking to it.
The monetary restriction applied in the economy during the one and a
half years is not the environment in which the small enterprise can operate
and develop undisturbed. Thus we should not think that the ten thousands of
small enterprises were formed because of favourable financing conditions
created by the government, the financial institutional system and other orga-
nisations with an objective of it. Just it proves the contrary to be true. The
overwhelming majority of small firms is in a very difficult financial situation,
the normal undisturbed operating conditions are not ensured. Despite the fact
that the capital circulation in small enterprises capable of market realisation
can be viewed sufficient, as a result of organic capital scarcity they cannot
obtain the capital resources minimal needed. The monetary restriction raised
the „threshold of dealing with someone" so high that the majority of small
firms does not qualify as potential borrowers.
Contrary to the appearance we need to say, that the vegetating of
small enterprises with scarce capital without resources is not really a virtue,
but rather a forced adjustment that should be avoided. We do not think, how-
ever, that a mass exemption from the undifferentiated rigidity of monetary
restrictions should be granted in favour of small firms. The discrimination
in favour of small entexplises does not mean that the large companies should be
discriminated against. We do not wish the relatively high burden on small
enterprises to be compensated by using the large companies' resources. The
small firms would not need to compete with the larger companies on the
free ways of bank credits and money market. It does not work like that in
the whole World. We should think, however, there are known institutions
and methods that prefers the capital supply to small firms, that are capable of
compensating the natural disadvantages of small ventures. After decades of dis-
criminatory treatment it would be a mistake to consider the small enterprises
as the economy maintaining sector that will take over the place from the pre-
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Discussion Papers, No. 19.
vailing large companies. In all over the World the small enterprise enjoys
allowances in conformity with the market through interest reduction, tax allo-
wances, and other exemptions from social costs. An important condition to
gain the above listed allowances is that the business unit must be a small en-
terprise in the real sense of the word. There is still ahead of us a clearing and
settling process in our economy, and as a result only such a circle of small busi-
ness firms will survive that have the classical features of small enterprise.
Thousands and ten thousands of newly formed small business units have to
integrate organically with the market processes, and find fix buyers and part-
ners to co-operate with, and take their place in the market.
We think that it is important to make easier to found and to start a new
venture. This undoubted help, however, should not be mistaken for a definite
easement of stepping on the market.
Because of the short time, the prevalence of closed forced markets and the
limited entrepreneurial knowledge a great number of small enterprises has not
yet integrated with the market organically. By market integration we mean
great number of buyers and sellers in relation to one small enterprise, the ex-
tensiveness of market relations, the multiple threaded integration with the di-
vision of labour. Considering all these lots of difficulties need to be overcome.
Small enterprises demand much more help for creating the business infra-
structure surrounding them. Several business and top executive functions are
known that are luxury to operate in each firm and put unreasonable burden on
entrepreneur. Masses of small business units have to be provided with these
services, and the state assistance would be indispensable in it.
When the owners and top executives of small enterprises with an ob-
jective of manufacturing and service are complaining about the lack of a bu-
siness supportive environment, they harp on the unreasonableness of some
of the burdens. They think that the revenue, coming from levy, will be used
for financing the maintenance of the inactive bureaucracy. The small busi-
ness burdens that are hard to bear not only suggest that the business organi-
sations with scarce capital „need to provide for" others but also that the achieve-
ment of a small entrepreneur does not meet with fair social recognition. When
mentioning the importance of promotion we never mean subsidy by it. Only the
small enterprise belonged to the size category of which some business units had
never got even minimal state resource in the vanished state economic system.
The lack of promotions, capital grant and any kinds of financial assistance also
meant that the state drew resources (in net sense) from the tolerated small
business sector. In a situation like that the enterprise sphere would never be ca-
pable of significant accumulation. After the radically changed situation the
small enterprises would not demand subsidies and investment promotions,
but the decrease of the general taxation to a level that would be in conformi-
ty with the real load bearing capability of small-sized business units. We
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Discussion Papers, No. 19.
should avoid that the small business sector, increased in number and output,
would become the subject of the well-known state capitalist exploitation. If
we put too much burden on enterprises with low load bearing capabilities we
push them (against our intention) to a direction that they will become interested
in using evasions. If the large companies' successful transformation into busi-
ness associations, turning them round onto their feet, their restructuring
based on the principle of efficiency will be accomplished then we can count on
the development and stabilisation of manufacturing, co-operating, market, fi-
nancing relations and the relation of division of revenue between the small
and large enterprises. The small enterprises cannot be put into a position by
increased state exploitation that makes them to become someone using tax
evasions, negligent, and incapable of market co-operation. In a region where
the smaller-sized ventures are of great importance, there the economic poli-
cy cannot become a paralysing burden on small enterprises.
The managerial competence, the right risk undertaking, the capital, and
the characteristic of the market make small enterprises the proper business
size where the knowledge of top executives operating the capital offers the best
result. When in a short period hundreds of thousands of individual enterprises,
and ten thousands of smaller business associations were formed, then the
owners and the ventures had just recognised that they could expect the well-
founded success for their efforts only at the given size, risk and liability under-
taking. The economic policy makers are bound to realise that this radical de-
velopment reformed the size distribution of firms in a spontaneous and very
progressive way. The government's interest can only be to stabilise this ex-
tended entrepreneurial circle and to integrate them with the operation of the
national economy. The role of governmental economic policy in the evolving
market economic system will profoundly be transformed compared to the
previous one's and it will rather become an indirect factor of orientation.
The transition is very complex, and in the middle of a crisis we ought not to
make a mistake by compensating the losses of the large company system (being
in a deep crisis) with the revenue levied from the small enterprises. Since
the current situation is not without these kinds of dangers, it is to be feared that
the small enterprises will take a growing proportion of their activities, business
transactions, financial relations to the informal economy. A rational burden is
the foundation of trust between the state and the entrepreneur, the lack of it
might be a source of a wide range of far-reaching problems.
2.6 The small enterprise as market competitive factor
After several decades of partly successful economic reform experiment, at the
turn of the last decade the creation of competitive market economy's institutions
began according to a definite concept. The old size distribution of firms was not
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
only causing problems because the large companies were predominant but also
because it was the inflexible system of the monopoly of firms distribution. The
greatly monopolised institutional system of the companies excluded the smallest
chance for competition. After the size distribution of firms had turned round,
there was a hope that the monopolistic structure would get looser, and that a
competitive situation would evolve. The results of the last three years show that
the chance for market competition has definitely become better and lots of mo-
nopolies have disappeared. The segment markets with many actors appeared
particularly in the trade and service industry, the consumers' choices increased
significantly.
Despite these undoubtedly favourable developments the monopolistic
characteristic of the firms distribution of the national economy has not yet dis-
appeared entirely, and the exclusive effect of several monopolies prevails
undisturbed.
In spite of the radical increase in the number of firms the considerable
segmentation of markets, and the monopolistic conditioning often characterising
small entrepreneurs are causing problems. A wide circle shows inclination for
cartelising, to sign agreements excluding competition, that is the remains of mo-
nopolistic behaviour are still haunting.
Despite the welcome increase of small enterprises we should not think
that the small shops' dependency from the consumers, and the market increased
to such a high level that its effect would be felt in quality, price or in a more ac-
curate performance. Up till now the quantitative conditions of the competitive
market have appeared by the fast increase of firms in number, but the com-
pulsion for competition causing qualitative improvement has not yet evolved.
The newly formed small enterprises improved the market supply so significant-
ly that the shortage of goods and services has disappeared in most of the cases,
and more over a significant surplus of them appeared on numerous market seg-
ments. The source of problems might be that a surprisingly large proportion of
small firms concentrate its activity on intermediate trade and within it, on dis-
tributing import goods that does not generate to much of surplus value. The
market competition situation could be reinforced in the best way by the opera-
tion of more and more small firms that are capable of producing significant
value added. There would be a need for numerous small enterprises that plan
their activities for the long-run, establish it gradually, and endeavour to find
solid market positions.
Probably the government will not be interested in winding up the re-
mained large monopolies, since they (except for those in deficit) can be consi-
dered more reliable as tax payers and resources of revenues than the other
forms of ventures. The small enterprises as the most responsive points of the
market surface fill in functions, from which the consumer, the partners of
co-operation and the market in general benefit, but less direct budgetary advan-
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Discussion Papers, No. 19.
tage derives from them. The whole market becomes more responsive, flexible,
and capable of better complying by filling the gaps of the size pyramid. The
social benefit derived from it is less palpable for the economic policy makers
and they appreciate it to a less extent. They consider the small firms as the most
unreliable tax base, and they rarely pay attention to the fact that the domestic
small enterprises need to create the minimal conditions of financing capability
without any help of external resource. In a situation like that we should not be
surprised that the income exhaustion of small firms would be definitely disad-
vantageous during the first couple of years after foundation.
In what will these constantly growing small enterprises compete? They
will compete with each other for the fulfilment of the consumers' demand, also
to fill the position in co-operation and home industry. The small enterprises be-
coming solid in capital, and market position, gaining reputation will become the
solid bricks of the dual firm structure based on the size relations if they could
maintain, beside producing on low expenditures, their capability of flexible
responsiveness. Soon it needs to be realised that the small and large enterprises
are not the problem of choice but they are precondition one another, built on
and complementary of each other. A well operating competitive market eco-
nomy is inconceivable without an extended small entrepreneurial sector con-
sisted of units capable of competition individually. They are counted on as com-
petition promoting (directly and indirectly) factors. The expenditure level, the
productivity and the competitive capability of large companies' sector can be
favourable modified through some transmission, based on wide ranged co-
operation with the small entrepreneurial sector. Thus the only way to reinforce
the competitive economy is to integrate organically the numerous new small
enterprises with the division of labour of the macro economy.
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3 THE LEGAL FRAMEWORK CONCERNING SMALL
AND MEDIUM-SIZED ENTERPRISES
3.1 Introduction
According to statistical data almost ninety thousand registered firms are ope-
rating in Hungary. The overwhelming majority of them belongs to small and
medium-sized enterprises. Slightly more than ten percent of the registered firms
is state-owned companies together with the co-operatives and companies li-
mited by shares. Considering output, sales, number of employees some of them
belong to the category of medium-sized enterprises, and some to the large en-
terprises. With respect to such criteria ninety percent of the registered firms
can be considered small and medium-sized enterprise.
This study gives an overview of the rules regarding the operation, the
self-government, the possible transformation and the termination of small and
medium-sized enterprises including insolvency (bankruptcy, liquidation, wind-
ing up) and the laws related to market behaviour.
The study put an emphasis on introducing the forms of business associa-
tions separately with respect to the fact that most small and medium-sized ven-
tures choose one of the forms of business associations for their organisation and
operation. Beside that the reason for the particular attention given to business
associations is that most of the state-owned companies are mandated to trans-
form into a business association. This possibility is also given to co-operatives.
Considering all of these, the study will analyse the most important pro-
visions of the following statutes: the Act on Business Associationsl, the Act
on State-Owned Companies 2, the Act on Co-operatives 3, the Act on Indivi-
dual Enterprise4, the Act on the Transformation of Business Organisations
and Business Associations 5, the Act on Court Registration and the Legal
Supervision of Firms 6, the Act on Bankruptcy, Liquidation and Winding up
Procedure7, the Act on the Prohibition of Unfair Market Behaviour 8.
3.2 The business associations as the general forms of small and
medium-sized enterprises
The modified Act VI of 1988 on Business Associations (hereinafter: Companies
Act) regulates the foundation, the organisation, the operation of organs of busi-
ness associations, the rights, the obligations and the liability of their members,
and the termination of the business associations. Besides determining each form
of business association the act covers a significant proportion of joint business
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ventures, including the business activities of citizens and business organisations,
also Hungarian and foreign joint business activities.
Before the enactment of the Companies Act state-owned companies and
co-operatives were the prevailing forms in the Hungarian economy. In 1984-
1986 the state-owned companies went through a major organisational reform.
At about 25 percent of them remained under state supervision and control, 75
percent was transformed into either a self-governing company under the general
management of a Company Council, or a self-managing company operating
under the general management of the general assembly of the employees (or the
assembly of their representatives). The self-governing and self-managing form
became prevalent among the small and medium-sized state-owned companies. 9
The Companies Act considerably extended the possibilities of citizens to
association. It increased the freedom to form an association according to the
principles of indifference in competition and sector. The business opportunities
of small-scale industry and retail significantly increased following the enact-
ment of the Companies Act.
Most of the organisational barriers that previously stopped the foreign
working capital in appearing in Hungary were abolished by the Companies Act.
It became possible to form a business association with a majority or even with a
100 percent of foreign interest in it. It is an important fact with respect to
study's subject, since most of the business associations established with foreign
participation or exclusively with foreign capital by a foreigner belong to the ca-
tegory of medium-sized enterprises. Simultaneously with and jointly to the
Companies Act's entry into force the Act XXIV Regarding Investments by
Foreigners in Hungary was passed, too.
The Companies Act is not only significant with respect to its content but
also to its volume. It consists of more than three hundred paragraphs, three
major parts and seven chapters. In the first part the fundamental rules related to
business associations are formulated in a principled manner and it contains
general provisions that apply in part or in full to each form of business asso-
ciations. The second part gives detailed rules of the business associations se-
parately. The third part contains the closing provisions. The followings can be
stated about the above mentioned.
Among the general provisions on business associations the provisions
concerning the foundation of business association are of importance. The le-
gislator started from that the business association is a contractual relationship
between the members that comes to existence by unanimously and mutually
expressing the will of the partners. In accordance with that, the Companies Act
provides that a contract of association is needed for the foundation of a business
association. The basic document of the one-man limited liability company is
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called the instrument of foundation, while in case of the company limited by
share it is called the articles of association. The contract of association regulates
the relationship of the partners for a long period, but it has important provisions
related to third persons, too. Thus the Companies Act stipulates the written form
as a validity condition, the breaching it makes the agreement null and void.
Though the contract of association need not to be embodied in a public
document or in a private document of full probative effect — signed by two wit-
nesses —, it is essential, that it would be signed by all members and counter-
signed by an attorney (legal adviser).
The general rule of the Companies Act with respect to the contents of
the contract of association declares the freedom of contract, that is the mem-
bers can freely determine the content of the contract within the limits of the law.
It means that the majority of the provisions laid down in the Companies Act
is permissive in nature, that is they are applied only if the members do not
agree otherwise regarding the matters in question. In other words, the con-
tracting partners can formulate the content of the contract of association ac-
cording to their ideas and interests within the limits of the laws.
The provisions on the company limited by shares, however, are man-
datory, and the partners have less contractual freedom. By establishing this
form of business association the partners may depart from the provisions of
the act only if it is expressly allowed to.
We could consider Section 21 of the Companies Act as a safeguard
provision. It stipulates those content elements of the contract of association that
should be included by the associating partners. These are the followings:
• the firm-name and registered address of the business association,
• the names of the members (and the firms) and their address (regis-
tered address),
• the activities of the business association,
• the assets of the business association and the time and the manner in
which they will be made available,
• all the provisions specified as obligatory by the Companies Act for
each form of business association.
The contractual freedom does not mean that there are no other legal re-
strictions concerning for example the determination of the firm's name. The
already cited Act on Court Registration and Legal Supervision of Firms defines
the principles (exclusiveness, reality, particularity) that have to be taken into
account by the associating partners.
The Companies Act makes the foundation of business association and
the participation in existing business associations wide open for all natural or le-
gal persons. In principle this possibility is existing for the state, legal persons,
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partnerships without legal personality and natural persons (Hungarian and fo-
reigner), too.
It does not mean the restriction of contractual freedom that some activities
(financial institutions') may be conducted only in the prescribed form of busi-
ness association, other activities may be engaged in only under a concession
contract, or sometimes certified qualifications or licence by an authority are
required.
When establishing a membership relation the provision on the prohibition
of accumulating unlimited liabilities as a creditor protecting provision has to be
considered by the associating partners. Thus a natural person may be a member
with unlimited liability at any one time of only one business association.
Since 1992 the requirements of the related international recommenda-
tions (ISIC Rev. 3 and NACE Rev. 1) have been in effect for formulating the
activity of a business association in the contract, because the harmonisation of
national sectoral categories is greatly emphasised at the international level.
The assets of a business association are made available by the members.
At the time of foundation, the assets of the business association consist of cash
contribution and non-cash contributions. The member supplying the non-cash
contribution is liable to the business association for a period of five years from
the date of the contribution with regard to that the value of the contribution at
the time of making it is as indicated in the contract of association. If it is proved
within that time that the value of the non-cash contribution was less at the time
of supplying it than the amount indicated in the contract of association, then the
person who supplied the non-cash contribution is obliged to round off his con-
tribution with cash or an additional non-cash contribution to that amount.
The members have financial interest in the operation of the business asso-
ciation. It is not limited to the obligation of supplying the financial contribution,
it manifests in that the members jointly share in the net earnings and the losses
during operation. Within that the measure of share of each member may be
freely determined according to the provisions regarding the different forms of
business associations.
The market stability and the public interest demand that only business as-
sociations formed in accordance with the laws would participate in the business
life. Because of that the foundation has to be notified to the court of registration
and all the related important documents need to be filed, too. The registration
procedure starts on request, it is not based on the court's own initiative.
To prepare and to obtain the documents needed for registration take time,
thus the Companies Act stipulate a thirty day period for filing the notification
for the purpose of registration. The omission or delaying in sending the notifi-
cation may be sanctioned by levying a fine.
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Following the filing of the notification for registration the court of re-
gistration examines the legality of foundation on its merits, and after verification
it registers the firm. The business association comes into existence by its regist-
ration in the firm register. The writ of the court of registration ordering registra-
tion has retroactive effect, that is a business association as an independent sub-
ject of law can be considered existing by the registration in the firm register.
For practical purposes the Companies Act links the existence of the busi-
ness association not to the registration in the firm register but to the time of the
conclusion of the contract of association or the adoption of the articles of asso-
ciation.
The business associations are market actors, they enter into contractual
relations with different business partners. Following registration, that is why is
it necessary to publish the most important data of the existing business associa-
tions. The court of registration publishes them in the Firm Registry Gazette.
If the court of registration refuses to register a business association it has
to cease its activities after the receipt of the final decision. The interest protec-
tion of creditors of a business association under registration procedure is se-
cured by the provision that stipulates that the persons acting in the name of
a business before its registration are jointly and severally liable without limi-
tation for obligations undertaken in the joint name.
Among the general provisions regarding business associations separate
titles are dealing with executive officers, supervisory board and auditors.
Since most of the times the business associations are work organisations,
it is reasonable to appoint a person or a board to manage the organisation and to
fulfil the legal representation of the business association.
According to the act in effect the executive officers are: the general ma-
nager at the business union and at the joint enterprise; managing directors at the
limited liability company and members of the board of directors in a company
limited by shares. A person convicted for a crime and sentenced to enforceable
imprisonment in a final judgement may not be an executive officer of a busi-
ness association as long as he is not relieved from the detrimental legal conse-
quences.
The executive officers, members of the supervisory board, and auditors
may be elected for a definite period not exceeding five years. The business
association is obliged to notify the court of registration in case of any changes
concerning the registered persons.
The executive officers, members of the supervisory board and auditors
have to act with such a care as may generally be expected of persons holding
such office. They are liable according to the general rules of civil law for the
damage caused to the business association through a breach of their duties.
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Discussion Papers, No. 19.
Executive officers, members of the supervisory board, auditors often come
to information during the regular course of conducting business that may quali-
fy confidential. Executive officers are obliged to treat as confidential all know-
ledge, information, data, facts related to the proper operation and needed for its
promotion if it is possible to keep them as confidential. If the executive officer
breaches the obligation of confidentiality, the provisions of the Civil Code con-
cerning the violation of rights pertaining to persons are to be applied against
him.
The duty of the supervisory board of a business association is to over-
see the management of the association. Pursuant to this it may require reports or
information from the executive officers and leading employees of the business
association, it may itself inspect or have inspected by an expert, the books and
records of the business association. The supervisory board has to inspect all re-
ports of importance brought before the supreme body of the business associa-
tion, the balance sheet and the statement of assets and liabilities. The chair-
person of the supervisory board announces the results of the inspection. With-
out that, no resolution may be validly adopted regarding the reports, the ba-
lance sheet and the distribution of earnings.
At concluding the contract of association the members of the business
association may stipulate that the supervision over the management has to be
carried out by an auditor instead of, or together with a supervisory board. It
shows that the legislator endeavoured to make possible the participation of
impartial experts from outside in supervising the operation of a business asso-
ciation in any case. The election of an auditor is mandatory for companies
limited by shares for the purpose of protecting creditors and minorities. Si-
milarly the operation of an auditor is mandatory for one-man limited liabili-
ty companies of which initial capital exceeds fifty million forints. The auditor
may inspect the books of the business association, and require information from
its executive officers and employees. It may examine the cash-in-hand, the port-
folio of securities, the stock of goods, the contracts and the bank accounts of the
business association. The auditor may attend meetings of the supreme organ of
the business association and the supervisory board. He has to attend to the gene-
ral meeting of a company limited by shares. If an auditor finds that a signifi-
cant decrease in the assets of the business association may be expected he has to
inform the supervisory board, in the absence of such board, the business associ-
ation and has to request the calling of a meeting of the supreme organ of the
business association.
The second and most extended part of the Company Act deals with each
formation of business associations. The Company Act accepts the following
forms of business associations:
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Discussion Papers, No. 19.
• partnerships,
• business union,
• joint enterprise,
• limited liability company,
• company limited by shares.
From our study's point of view great attention should be given to part-
nerships and limited liability companies, since major proportion of the small
and medium-sized enterprises belong to these two categories.
The Company Act defines the partnership as a basic form of business
association without legal personality.
The partnership is a typical form of the individuals joining business asso-
ciations. It is a wide spread and applied form in most of the legal systems. Pri-
marily the partnership is a form of business association that is suitable for satis-
fying the needs of a business firm with small number of employees or often
family business.
Their basic feature is the unlimited joint and several liability of the mem-
bers and the obligation of the natural persons for personally taking part in the
activities.
The legal formulation includes the above mentioned criteria when it
provides that „by the contract of association aimed at forming a partnership,
the members of the association undertake, with unlimited joint and several li-
ability, to carry on common economic activities and to place the necessary
,
assets at the disposal of the association".
By examining the internal legal relations of partnership we can state that
the contribution of the partner in cash and in expendable or replaceable things
passes into the ownership of the business association, his other property con-
tribution, in accordance with the provisions of the contract of association,
passes either into the ownership or the use of the partnership.
In the contract of association the partners may entrust one or more
partners with the management. Except for exceptions included in the Com-
panies Act the partners make decisions related to the affairs of the partnership
by a majority of votes, each partner has one vote. For making the most impor-
tant decisions (e.g., to expel a partner) a majority decision of at least two-third
is required. In fundamental matters the unanimous decision of the partners is
required in partnerships.
Though the operation of a partnership is mainly based on the personal
participation of the members, the Companies Act makes possible for the part-
nership to employ employees, contract labour, family member helpers and vo-
cational trainees.
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A partner is entitled for remuneration for his personal participation. The
earnings and losses stated in the balance sheet are distributed among the part-
ners in proportion to their property contribution.
For the obligations of the partnership the partnership is primarily liab-
le with its own property. If it does not cover the claims, the partners are jo-
intly and severally liable without limitation with their own property.
The Companies Act gives the itemised list of the termination of the
business association.
The Companies Act defined the work partnership and the work part-
nership operating under the liability of a legal person as subtypes of the part-
nership. The provisions of the Companies Act previously in effect need to
be applied to the work partnerships and work partnerships operating under
the liability of a legal person that have been registered in the firm registry.
This two forms of business association represent a significant proportion in
the circle of small and medium-sized enterprises. It has to be mentioned that
these forms may have been founded since 1981, and they helped to demolish
gradually the prevalence of state companies and co-operatives. Probably a sig-
nificant proportion of them will continue to pursue their activities in the form of
a partnership.
The Companies Act defines the limited partnership as a simple form of
business association without legal personality. This form of business association
is also considered as a subtype of partnership. It is one of the most often chosen
form. Through this formation of business association it became possible to in-
vest in business ventures under limited liability without personally participating
in them for both natural persons and business organisations.
According to the Companies Act by the contract of association aiming at
forming a limited partnership the members of the association undertake to carry
on common activity, with the liability of at least one of the partners (general
partner) for the obligations of the partnership being unlimited jointly and seve-
rally with the other full partners, while the liability at least one of the part-
ners (limited partner) being limited to the extent of the property investuuent the
partner made.
Since there is no mandatory minimum property contribution for estab-
lishing a limited partnership in the Companies Act, it became the favourite and
often chosen form of business associations by those having smaller capital.
Limited liability company is the most often founded form of business as-
sociation all over the world. This good position among the business associations
is kept in the Hungarian economy, too. The statistical data shows that forty per-
cent of the registered firms belongs to this type of business form. It is worth to
scrutinise whether what makes this business form so attractive world wide and
in Hungary.
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The limited liability company is situated between the partnership and the
company limited by shares. We could argue that it is mixed type of business as-
sociation it is a fortunate mixture of the partnership with its personal participa-
tion and the impersonality, and the capital joining character of the company li-
mited by shares.
The flexible organisational and operational rules regarding it makes this
formation suitable for family type ventures or enterprises with few employees,
and at the same time for a business venture established by several members
with solid capital, too.
The limited liability company mainly differs from the partnership and the
company limited by shares in its size. The partnership is a business association
with few members. In the case of a company limited by shares the relatively
high authorised capital is composed of the cash contribution paid up by nume-
rous shareholders.
Considering this approach the partnership can be classified as a small en-
terprise and the company limited by shares definitely as large enterprise. In this
respect the limited liability company is situated somewhere between the two
of them.
Because of the personal character of the rules regarding limited liability
company it is not really suitable for the co-operation of more than thirty or even
fifty members. Contrary to the regulations in some foreign laws, the Companies
Act does not determine an upper limit in the number of members of a limited
liability company. The experience shows that a significant proportion of the li-
mited liability companies was formed by and operates with two-ten members.
In the case of limited liability company there is not much difference
between the authorisation of the person practising the rights regarding owner-
ship and the person managing business affairs. The members themselves may
participate in the management of the business association or may pursue other
kinds of business activities.
It seems that this form is good for making the members to consider the
venture as their own, in contrast to the company limited by shares where the
impersonal character of the business association is prevalent.
The limited liability company also differs from the partnership in that it is
a legal person, and the liability of its members is limited to their furnished pro-
perty contribution.
The other important characteristic of the limited liability company com-
pared to the partnership is that the members are not obliged for personally parti-
cipating in the activities of the association.
Besides some similarities there are major differences between the limited
liability company and the company limited by shares. The following character-
istics are worth to accentuate:
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• it is prohibited to issue securities evidencing membership rights, more
precisely property rights in limited liability company;
• there is a fundamental difference in the way the two forms of business
associations are regulated. There are safeguard provisions built in the
Companies Act, when the provisions regarding the company limited by
shares are stipulated as mandatory. It means that the members may not
deviate from the provisions of the act unless permitted by law. Contra-
ry to those, the provisions on limited liability company are permis-
sive, thus the members can freely deviate from the provisions of the
Companies Act in the contract of association, except for the few cases
when it is expressly prohibited. That is the contractual freedom is much
more „extensive" in respect to limited liability companies than compa-
nies limited by shares;
• the organisation and the operation of the organs of the limited liability
company are much simpler than the organisation and the operation of
the company limited by shares.
The Companies Act gives the following definition for limited liability
company: „A limited liability company is a business association formed with a
prime capital made up of quotas of predetermined amounts, toward which the
liability of a quota holder is limited to supplying his quota and other possible
property contributions determined by the contract of association. A quota
holder shall not be liable for the obligations of the company."
It appears from the statutory definition that the member's liability towards
the association primarily is to furnish his quota. Thus the characterising rule of
liability is that the member's liability does not extend to his private property,
thus it may not be counted on when paying off losses. Maybe it is not an over
statement that possible this peculiar liability makes the limited liability compa-
ny so attractive to entrepreneurs. At the same time the Companies Act has seve-
ral creditor protecting provisions since only the property of the association
can be considered as a base to cover their claims.
The possibility needs to be mentioned here, that a limited liability com-
pany may be formed also by one man (one-man company). By this the legis-
lator made it possible for the entrepreneur to start a business by himself where
his liability towards the association is limited to his property invested in it. This
is the only organisational form in Hungary that allows it.
The business union is one of the forms for small and medium-sized
ventures. Their number is insignificant, the number of the operating business
unions hardly reaches one percent of the registered firms. Through the re-
gulation related to it, it became possible for the members with legal personality
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in the business union to supplement their main activities, and to operate such
organisational units that would not be efficient to operate in other organisational
conditions. In this form of business association the conditions of the organised
flow of market information, common marketing activities, research and deve-
lopment can be favourable established. Usually the business unions are small in
size and do not require significant capital investments. Contrary to the other
types of business associations the business union does not aim at gaining profit
for itself in the course of its business activities. The actual result of the activities
conducted in the union appear in the members own management. The co-ordi-
nation, organisation of the management of the business union's members inevi-
tably brought about the demand for the interest representation of the business
union's members in certain professional questions.
The Companies Act defines the business union in the following way:
„A business union is a business association established by legal persons to pro-
mote the efficiency of their own management, to harmonise their business
activity, and to represent their business interests. A business union shall not aim
to make profit for itself, its members shall jointly and severally liable for the
obligations of the business union exceeding its assets.".
The joint enterprise is one of a peculiar organisational and operational
form of the business associations that may be established exclusively by legal
persons. It is a possible formation for property joining business associations.
The joint enterprise conducts its business activities based on the furnished pro-
perty contribution of the members. The members providing property contribu-
tion can influence the operation of the enterprise through the board of ma-
nagers.
According to the definition of the Companies Act: „The joint enterprise is
a business association founded by legal persons, which shall be liable for its ob-
ligation with its stock capital contributed by its members, and with its property
other than the stock capital. If the property of the enterprise does not cover the
liabilities, the members shall be liable jointly as guarantors in proportion to
their contribution."
The provisions relating the joint enterprise are similar to the stipulations
regarding business unions in several aspects. The difference, however is signi-
ficant in respect to liability and bearing risks. While the liability of the business
union's members is unlimited, joint and several for the obligation of the union,
the members of the joint enterprise are liable for the enterprise's obligation
jointly as guarantors in proportion to their contribution provided for the com-
mon economic activity.
The joint enterprises similarly to the business unions do not represent a
great number. The number of both business formations (business union, joint
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enterprise) is slowly decreasing, there are no new foundations. All of this indi-
cates that we need not to count with this two types of business forms for the
long run.
The Companies Act defines the company limited by shares as the most
developed form of business association. Though this form of business associa-
tion can hardly be put in the category of small and medium-sized enterprises, in
practice some of the company limited by shares can be considered rather
medium-sized enterprises than large business ventures. It is well demonstrated
by the definition given in the Companies Act on the authorised capital of the
company limited by shares. In comparison with the limited liability company
the followings can be stated:
• the amount of the prime capital of the limited liability company may
not be less than one million forints, the sum of the contributions in cash
at the time of formation may not be less than thirty percent of the prime
capital and five hundred thousand forints;
• the authorised capital of the company limited by shares may not be
less than ten million forints, the amount of cash contribution at the time
of foundation may not be fess than thirty percent of the authorised
capital and five million forints.
Since part of the companies limited by shares are founded with the mini-
mum authorised capital (ten million forints), consequently we could classify a
certain number of the companies limited by shares as medium-sized enterprises.
Thus within the framework of this study, the company limited by shares should
be dealt with as a business form belonging to the category of medium-sized
enterprises at least by examining its statutory definition.
The Hungarian and foreign legal traditions regarding business associa-
tions were taken into account in formulating the Hungarian legal definition of
the company limited by shares. The such principle requirements prevail in the
legal regulation regarding the company limited by shares like:
• impersonality,
• possibility for quick return on the invested capital,
• risk undertaking but with limited liability for the risk taking,
• complex internal organisation.
According to the Companies Act: „The company limited by shares is a bu-
siness association formed with an authorised capital composed of shares of a
predetermined amount and par value, the liability of the members of which is li-
mited to supplying the amount of the par value or issue value of the shares. O-
therwise the shareholders shall not be liable for the obligations of the corpora-
tion."
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The number of companies limited by shares shows an increasing trend,
thus this form of business association, business venture should be accounted
with for the long run.
3.3 Co-operations as possible forms of small and medium-sized
enterprises
A small proportion (6,616) of the registered firms (89,612) is operating in a co-
operative form. Not counting the 1,300 agricultural co-operatives, the majority
of the co-operatives can be classified as medium-sized enterprise. The known
forms of the co-operatives (besides the agricultural co-operatives) are the in-
dustrial co-operatives, the consumers', sale and purchasing co-operatives, the
savings co-operatives, and the other co-operatives (housing co-operatives,
boarding-house co-operatives, etc.).
The new act on co-operatives undertook the democratic civil traditions of
the when the following definition was formulated: „the co-operative is a com-
munity established in accordance with the freedom to assemble and the prin- •
ciple of self-help, it conducts business and other activities serving the interest of
the members by the personal participation and the property contribution of the
members within the framework of a democratic self-management".
We need to pay attention to the conceptual element of the definition
according to which the co-operative is a venture of the members. Since mini-
mum five members are required for the formation of a co-operative, the given
co-operative can be both small or medium-sized enterprise.
The new legal regulations concerning the co-operatives operating as legal
persons show significant approach to the regulations regarding business asso-
ciations. There was a time when the co-operatives were regulated (the Com-
mercial Act of 1875) as a form of commercial association in Hungary. There is
a separate act on co-operatives. The approach of the professional literature
should be agreed with when the co-operative is considered such a business
association to which the scope of the Companies Act does not extend.
The Act on Co-operatives starts from that the members of the co-opera-
tive are natural persons, though the articles of foundation may allow the mem-
bership of legal persons as well.
The provisions on foundation of co-operatives (the calling of the constitu-
tive meeting of the general assembly, the approval of the articles of foundation,
the election of the executive officers, the firm registration, etc.) hardly differ in
principle from the legal regulations regarding the formation of business associa-
tions. The approaching similarity in the regulations is the result of the laws on
firms that consider this formation as a firm, besides that the co-operative is clas-
sified as a business association.
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Similarly to business association the co-operative comes to existence
by the registration of the court of registration.
A peculiar characteristic of the co-operative is that it is operating within
the frame of a democratic self-management. The content features of it are as
follows:
• the members themselves decide on all the matters related to the opera-
tion and the management of the co-operative and other activities ser-
ving the interest of the members,
• the members establish through election the mandatory bodies and those
required by their own need,
• the members themselves formulate the by-laws of the co-operative and
first of all the articles of foundation,
• the members supervise the operation of the co-operative and the activity
of the executive officers, and finally
• the members order the executive officers and managers to render ac-
count of their work.
The legislator follows the so-called classical co-operative principles in es-
tablishing co-operative membership relation (open membership), and in the sta-
tutory declaration of the members' basic rights and obligations. The member's
interest is accentuated not only in the definition of the co-operative but also in
the provisions on the property relationship between members and co-operative.
The co-operative business share, which mostly emphasises the interest of the
members, establishes the rights for sharing the realised profit according to the
resolution of the general assembly on its distribution. A registered share for the
member has to be issued about the distributed amount. The business share may
be transferred or inherited.
A separate chapter of the Act on Co-operatives deals with the rules of
mergers, disunions, transformations and terminations of co-operatives. Based
on the resolution of the members the co-operative may transform into a limited
liability company or a company limited by shares.
It needs to be mentioned that 1992 is a turning point for the co-opera-
tives. In this year the co-operatives accomplished the so-called property identifi-
cation, renewed the mandates of the executive officers, and decide on the appro-
val of the new articles of foundation. The co-operative had to decide whether to
continue its operation in a co-operative form or to transform into a limited liabi-
lity company or a company limited by shares. The legal regulations made it
possible for the member to leave the co-operative with his property.
Only two percent (1,968) of the registered firms (89,612) belongs to the
category of state-owned company. Presently the several times modified and
supplemented Act on State-owned Companies is still in effect. It regulates the
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foundations, organisations, management, etc. of the state-owned companies.
We need to disregard it for two reasons. On the one hand the overwhelming
majority of the state-owned companies cannot be considered small or medium-
sized enterprise. On the other hand the different legal rules promoting the crea-
tion of the market economy based on private ownership induce the state-owned
companies to transform into business associations, practically it means trans-
formation into a company limited by shares in most of the cases.
To indicate the connections it needs to be pointed out that the Parliament
passed an Act LEI of 1992 on the Management and Utilisation of the Entrepre-
neurial Property Remaining Permanently in State Ownership. The Decree of the
Government No. 126/1992. (VIII. 28.) Korm. rend. determined the business or-
ganisations falling under the scope of the cited act and belonging to the State
Assets Managing Corporation (Allami Vagyonkezele Reszvenytarsasag):
• remaining permanently in part or as a whole in state ownership,
• conducting activities stipulated in the Act XVI of 1991 on Concession
with state majority share.
The regulation indicates beside the name of the business organisation
the proportion of the business organisation's registered capital to the permanent
state property, and the business shares ensuring the state's permanent member-
ship (shareholder) rights; in the case of minority permanent state ownership the
minimum measure of state ownership; the fact that the business organisation
undertakes national public utility services. The number of these business orga-
nisations slightly exceeds the two hundred.
The increase of the individual enterprises' (based on private ownership)
share in the economy, and to become one of the significant factors of the econo-
my are essential prerequisite conditions for building up the market economy
based on mixed ownership.
The Act V of 1990 on Individual Enterprises creates the conditions for
establishing a one-man business venture with unlimited liability that may con-
duct firm-like activities not just through personal participation.
The cited act regulates the conditions of founding, operating and termi-
nating an individual enterprise. It defines the individual enterprise as a private
enterprise in which a natural person conducts his business in his own name, and
to his own risks, in a regular manner in order to gain profit.
A private enterprise can be exercised on the basis of notification and in
the possession of an entrepreneurial card. The entrepreneurial card is a notifica-
tion with a clause inserted by the authorised administration.
All entrepreneurs may be given only one entrepreneurial card, but it may
conduct several business activities based on that card. The individual entrepre-
neur is obliged to participate personally in conducting the activity, though he
may employ employees, contractual labour, helping family members.
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Private enterprise may pursue activity only if it meets the required quali-
fications stipulated in the relevant legislative rules.
The individual entrepreneur is liable for the obligations originating from
his activity without any limitation with his own property. Because of this a na-
tural person may found only one private enterprise and may not be simulta-
neously a member with unlimited liability of a business association.
An individual entrepreneur may be registered in the trade registration
kept by the court of registration, on his own request. In that case he will con-
duct his activity as a private enterprise.
Now the entrepreneurs still prefer business associations to private enter-
prises, it seems that there are financial and other reasons appearing in attitude
for that.
The individual enterprises (private enterprises) almost all, without ex-
ception belong to small and medium-sized enterprises examined in this study.
The foundation of an individual enterprise is the right of all natural per-
sons by the virtue of law. The act stipulates two conditions:
• unlimited capability of action, and
• permanent place of dwelling.
In case of meeting the above mentioned conditions only those may not
start a business who are excluded from the circle of individual entrepreneurs by
the itemised list of the act. Thus a person may not obtain an entrepreneurial card
or certificate, if he committed one of the crimes against the purity of economic
life, and has not yet been exempted from the detrimental legal consequences.
3.4 The common rules related to small and medium sized enterprises
-
The building up and the operation of the market economy require an authentic
register that certifies the most important data (firm register) of the organisations
operating in the economy, that makes it possible for the actors of the economy
to transform their previous formation (transformation), that regulates the situa-
tion with respect to the insolvency of business associations (bankruptcy, liquid-
ation, winding up), and finally that enforces the prevalence of the fundamental
conditions of market competition, the freedom and the purity of market compe-
tition (prohibition of unfair market behaviour). Before analysing the major cha-
racteristics of the legal regulations belonging to this subject, we have to point
out that naturally these regulations are applicable not only to small and me-
dium-sized enterprises but to all actors of the economy.
The Act on Court Registration and the Legal Supervision of Firms covers
the following subjects.
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It gives the definition of the firm, according to which „a firm is a legal or
natural person or their association registered in the firm register, that (who)
conducts business activities under its own firm name in a regular manner, may
acquire rights and undertake obligations and uses the firm name for its (his)
signature". In this place we can find the provisions on the authenticity of firm
registration, publicity, rules related to firm name, definitions of the courts of re-
gistration obliged to keep firm records:
• the act deals with the firm registers, the data, rights, facts, included in
them, the rules regarding firm registration, the rulings of the court of
registration at the time of liquidating or winding up the firm under a se-
parate title,
• in the general provisions on the firm registration proceedings the legis-
lator stipulates that generally the registration happens on request. The
provision serves the publicity and the safety of the market when man-
dating the publication of data, rights, facts registered in the firm re-
gister, in the Firm Registry Gazette,
• the act gives the objectives of the supervision of legality by the court of
registration in a separate part, it provides detailed rules on the types and
conditions of rulings regarding supervision that are applicable by the
court of registration. Within this frame the court of registration may
warn the person representing the firm to restore legal operation, it may
levy fine on the firm, supervise the resolutions of the firm from the
aspect of legality, may call the governing body of the firm, suspend the
operation of the firm for a definite period, and finally strike the firm off
the register and simultaneously declare its termination.
The declared aim of the Act on Transformation of Business Organisations
and Business Associations is to present rules, by the statement of general suc-
cession, on the transformation of the business organisations into business asso-
ciations and the transformation of the business associations from one into a-
nother, including their merger and disunion as well. According to the Act the
organisation under transformation is obliged on the one hand to prepare a plan
of transformation, on the other hand to prepare the balance sheet and to make it
supervised by an auditor. It has to be ensured that the property of the organi-
sation aiming at transforming would be transferred to the new organisation
on its real value. At the same time the newly founded organisation needs to be
protected from that the property recorded in an unrealistic value would not be-
come a burden later on. There are several creditor protecting provisions built in
the act (e.g., the publication of the transformation) in order to give guaranty for
the creditors of the organisation aiming at transforming, and to avoid getting
into a disadvantageous position because of the transformation. The proper exe-
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Discussion Papers, No. 19.
cution of the transformation without any difficulty is helped by the stipulations
regarding each form of business organisations.
The Act on the Procedure of Bankruptcy, Liquidation and Final Ac-
counting is a new „product" of the economic legislation in order to give assis-
tance, based on international and domestic experiences, in reorganising insol-
vent business organisations, through bankruptcy proceedings, and if it is not
possible, in terminating them through liquidation procedure, and in „managing"
the final settlement of solvent business associations about to terminate their bu-
siness activities 10.
The act affects all the actors of the economy being in a creditor or a
debtor position. Its basic characteristics are the followings.
The act regulates three forms of the procedure, the bankruptcy, the liqui-
dation and the winding up procedures.
The debtor may start bankruptcy proceeding against itself if it is probably
that it cannot pay off its debts or it is already insolvent. Liquidation procedure
may be conducted on the initiative of both the debtor and the creditor. In all
three proceedings the main actors are the debtor, the creditor and the courts that
follow the settlement proceedings regarding insolvency, and the final account-
ing settlement.
The act stipulates that in certain cases the head of a business association is
obligated to declare bankruptcy, namely, if the business association is incapable
to pay its debts back within a 90 day period following maturation. The head of
the company is held to be liable without limitation with his own property for
omitting to make the required announcements according to the general provi-
sions of civil law.
The objective of the bankruptcy procedure is to allow a three month
respite for settling the financial problems, and to prepare a plan for getting out
of the deep crisis.
The liquidation procedure may be conducted at the request of the debtor,
creditor, or the person responsible for the final settlement. In the case of an un-
successful bankruptcy procedure the court starts the liquidation procedure.
During the procedure due publicity must be ensured in order to protect the in-
terest of the creditors.
From the beginning of the liquidation process on only the liquidator is
empowered to make legal statements regarding the assets of the business or-
ganisation. It is a fundamental objective to reach an agreement between the
debtor business organisation and the creditor thus the possibility is always
left open in the course of the liquidation procedure to conclude a settlement.
On the basis of the final balance sheet and the proposal for property distri-
bution, the court issues a writ on the termination of the business association.
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In the event of a business association going out of business without a legal
successor a final settlement of accounts is called for. On the basis of the notifi-
cation of the top executive of the business organisation the court of registration
announces the starting of the final accounting procedure in the Firm Regist-
ry Gazette. From that on the creditors may announce their claims to the ac-
countant in charge of the final accounting within a period of sixty days. Fol-
lowing the preparation and approval of the required papers the court orders the
striking off of the business organisation from the firm register.
Finally the most important provisions of the Act on the Prohibition of
Unfair Market Behaviour need to be outlined.
The freedom and integrity of economic competition are basic precon-
ditions of market competition that is causing economic efficiency. In order to
protect the freedom and purity of economic competition forms of conduct that
are contrary to fair market practices must be banned and supervision over the
structural merger of enterprises must be introduced by creating the necessary
organisational forms. Accordingly, public interest linked to economic compe-
tition, the interest of the competitors and in connection with fair market beha-
viour the interest of consumers must be protected by the law.
As a summary we can argue that the legal institutions of the market
economy based on private ownership can be considered established. Their pro-
per function can successfully serve the efficient operation of small and me-
dium-sized enterprises.
Notes
1  Act VI of 1988 on Business Associations
2  Act VI of 1977 on State-Owned Companies
3  Act I of 1992 on Co-operatives
4  Act V of 1990 on Individual Enterprise
5  Act XIII of 1989 on the Transformation of Business Organisations and Busi-
ness Associations
6  Statutory Rule 23 of 1989 on Court Registration and Supervision regarding
Legality of Firms
7  Act IL of 1991 on Bankruptcy, Liquidation and Winding up Procedure
8  Act LXXXVI of 1990 on Prohibition of Unfair Market Behaviour
9  More about it in  SarkOzy T.,  1989.
10  More about it in  Dancs M.,  1992.
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4 NATIONAL, REGIONAL AND LOCAL INSTITUTIONAL
AND FINANCIAL SYSTEM OF ENTREPRENEURSHIP
PROMOTION IN HUNGARY
In the second half of the 1980s there were several institutional changes in Hun-
gary that could definitely be seen as the institutional framework related to
the market economy.
The development of the institutional system and its operation within the
legal framework began in 1987-1988. In 1987 the two-tier banking system was
created. In 1988 the multiple phase net sales taxation and the personal income
taxation came into force, and in 1989 the comprehensive laws of founding and
operating business associations were passed. The government economic policy
programme published in 1990 requires the expansion of small and medium-
sized enterprises in several areas and the extension of the private ownership's
sector, and it promises numerous measures to be taken for their development.
There has been a significant progress in the market economy and by it in the
field of promoting entrepreneurship, though the measures concerning explicitly
the small and medium-sized enterprises and the efficiency of building up the in-
stitutions do not correspond to the present and growing importance and role of
the small ventures. Up till now the privatisation has not linked up with the deve-
lopment of small private ownership and small enterprises. The unpredictability
of the economic conditions and the great uncertainty incline the stratum of the
small enterprises to think in short run. Unfortunately the already existing diffe-
rent business developing programmes, measures, their institutions, the privati-
sation, and the decentralising measures taken to disintegrate the state owner-
ship do not create a consistent system, so their efficiency is not adequate. The
new Act on Accounting, the Act on Bankruptcy, Act on Financial Institutions
coming into force from 1992 try to establish economic perspicacity, and unam-
biguously appreciable conditions for business environment. We see that among
the most fundamental problems related to small and medium-sized enterprises
are that the different supporting and allowance making measures and institu-
tions do not integrate to a programme of comprehensive economic policy, so
these measures are not efficient and predictable enough and inconsistent. The
government's declaration and programme concerning small and medium-sized
enterprises are missing. There is a need for establishing a governmental organi-
sation that would effectively take part in forming the economic policy by its co-
ordinating role while taking the special requirements of small enterprises into
account, by its resource allocating and advising role.
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4.1 Organisation and efficiency of the institution system
Next we will examine how the institution system of politics and economic poli-
cy concerning small and medium-sized enterprises is built up, and how much it
is effective in promoting. The extent of this study does not allow to examine the
institutional system of the economic policy related to the enterprises in full
width and details, so we concentrate those areas that are determinant in deve-
loping and supporting small and medium-sized enterprises in Hungary now.
4.1.1 National institutions
Despite lots of problems the national network of institutional system supporting
small and medium-sized enterprises is building up. These institutions either in-
directly as the institutions of the economic policy, or directly help in establish-
ing and operating ventures. The institutional system that is able to guarantee the
indirect promotion infiltrates to the institutions of economic policy. These can
effectively serve the ventures in the following areas:
• insuring adequate and predictable legal conditions,
• by a system of money market and finance that capable of serving small
enterprises, and a related scheme of promotions and subsidies,
• by a taxation system and social security that are calculable with a high
level of certainty, and impose reasonable burdens on,
• elaborating a concept of privatisation considering small and medium-
sized enterprises, and elaborating a sectoral and development concept
relying on enterprises,
• by an institutional system of foreign trade policy relying on small and
medium-sized enterprises, too.
The institutions of the following areas directly support, or at least they
declare to undertake to develop and to promote small enterprises:
• the organisations of business federation of entrepreneur,
• banks, financial institutions and other financial funds dealing explicitly
with financing small and medium-sized enterprises,
• business development foundations and agencies,
• consultant firms and agencies that give advice, furnish with informa-
tion, and with operational promotions, institutions dealing with training
entrepreneurs.
A contradictory picture not free of problems can be outlined about the na-
tional institutional system promoting ventures. The system of legal conditions
for establishing and operating the small entrepreneurial sphere based on private
ownership has practically been laid down. The freedom of venture is guaran-
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teed on a statutory level. From now on the emphasis can be put on to eliminate
the still existing legal and regulatory barriers, the legal conditions inherited from
the previous regime. At the same time, however, the lack of a comprehensive
reform of ownership and of the statute on privatisation without which there is a
feeling of the economic government's in determination towards small enter-
prises, indicates problems.
The place and the role of the small and medium-sized enterprises within
the process of privatisation is not clear-cut. It is to be feared that if the organisa-
tion of the Hungarian private capital into enterprises will be channelled on a
different route than the one of the privatisation of the state ownership, then the
domestic entrepreneurs that the government aspires to (GDP growth, employ-
ment, restructuring, etc.) will be left out from solving the nations' biggest prob-
lems. That situation would be helped on and the efficiency of privatisation pro-
bably would be increased, and its pace speeded up by the application and the
propagation of the followings: to increase the demand of privatisation by such a
credit construction within which both smaller ventures or private persons could
buy state-owned properties under relatively favourable conditions. It also means
that it would be possible not to buy the company only as a whole but shares of
it. For that reason the supply structure of the privatisation must be altered, since
the plant sizes of the previous, socialist companies do not suit the Hungarian en-
trepreneurs. It could be a further effective instrument if the institutions of new,
flexible technics of privatisation will develop, the leasing, rent option, mana-
gerial buy out, etc.
The institutional framework of the financial system has developed.
Though their role played in promoting, developing small enterprises are limited
by the burdens as a result of and inherited from the previous regime, and also
by the lack of domestic savings. Since getting hold of resources is one of the
major problems of establishing and operating small enterprises in Hungary we
deal with this problem separately, too.
The elements of the taxation system and the obligation for paying allo-
wances lay a major burden on ventures. It is not the task of this study to elabo-
rate it, but the elements related to the promotion and the restriction of small en-
terprises should not be neglected. Now the company tax is levied on every com-
pany, both on private company or state-owned company. It is indifferent with
respect to ownership, size or area of activity. The average amount of the com-
pany tax is 40 percent, considering the different bonuses, exemptions the actual
curtailment is only 30-34 percent The range of bonuses is quite wide. The prob-
lem, however, is that the circle of favoured ventures relatively often fluctuates
and the preferred activities and areas often change. An additional problem is
that the local governments do not receive anything from the company tax so
they lose an important source for promoting ventures. The personal income tax
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component of the taxation system affects only those small entrepreneurs who
do their business as individual entrepreneurs.
In 1991 the private ventures could choose between paying tax on their
income according to rules of the entrepreneur's profit tax or the personal in-
come tax. From 1992 this possibility was abolished. After that every individual
entrepreneur will be obliged to pay tax on all of their income according to the
rules of personal income tax. To avoid it probably lot of them will form simple
type of business organisation where the burden to pay tax is partly avoidable or
can considerably reduced. The third component of the taxation system is the ge-
neral turnover tax (GTT) that is similar in its fundamental principle to the sys-
tem used in the states of the European Community (Mehrwertsteuer, TVA,
VAT). The GTT system does not have promoting or restrictive elements related
to the small enterprises since it is prevalent in the sales sphere. The most impor-
tant tax burden imposed on ventures is the social security contribution. Social
security contribution is fully superimposed on wages and incomes. The burden
of the obligation to pay the contribution is extremely high. The employee is li-
able to pay 44 percent of the wages or similar forms of compensation as social
security contribution and beyond that 5 percent of the above mentioned incomes
to the Solidarity Fund of Unemployed. The employees pay 10 percent of their
gross income as contribution and 1.5 percent to the Solidarity Fund.
Similarly the individual entrepreneurs are liable to pay 44 percent under
the pretext of social security, 6 percent as pension contribution, and 4 percent as
health insurance. The current system of social security in effect means unbear-
able burdens particularly to those entrepreneurs who come under the ruling of
personal income taxation. For that circle of entrepreneurs the two liabilities to-
gether mean 70 percent measures on the average. Payment obligation of entre-
preneurs being on the personal income tax margin is close to 90 percent.
It also means that the entrepreneurs can freely use 30 percent of their in-
come on the average, and scarcely 10 percent on the margin for their own exis-
tence and developing the firm. Since social security contribution is not imposed
on dividends and interest-like incomes in Hungary, only 20 percent tax at
source is imposed on them, thus it is more beneficial to the entrepreneurs not to
reinvest into their own businesses. It can be said that the elements of the tax sys-
tem related to incomes, particularly the payment obligation of social security
contribution keep back entrepreneurial investments into the real sphere, and de-
crease the propensity to save.
The foreign trade activity of the companies and firms are co-ordinated by
the Ministry of International Economic Relations  (Nemzetkazi Gazdasagi Kap-
csolatok Miniszteriuma).  In 1991 the Investment and Trade Development Agen-
cy  (Befektetesi es Kereskedelemfejlesztesi Alap)  was organised with the objec-
tive to promote export activities and foreign investments. This institute is the
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trustee of the resources of the Trade Development Fund  (Kereskedelemfejlesz-
tesi Alap)  and the Investment Inciting Fund  (BefektetesasztOnzesi Alap).  Beyond
that it assists the entrepreneurs in finding foreign partners, furnishes investors
and trade partners with information. The current government policy tries to sup-
port the export activities, particularly the convertible export through different
institutions.
The most important institute in supporting foreign trade development is
the Trade Development Fund. In 1991 its resource was 5 thousand million fo-
rints. The Fund's promotion can be applied for by any company or firm through
an export developing tender system with no restriction as to ownership or form
of business organisation. It also means that there is no such institute that ex-
pressly supports the foreign trade activities of small and medium-sized enter-
prises in Hungary. At present the Fund is not available for export developing
investments any longer. The other important institute of promotion is the In-
vestment Inciting Fund. The resources of the Fund can be applied for infra-
structure investment and participation in privatisation by limited liability com-
panies and companies limited by shares if they are joint ventures with a capital
exceeding 50 million forints out of which the contribution of the foreign in-
vestor is 30 percent and its 50 percent is cash.
The other important area of promoting foreign trade is the 10-35 percent
export subsidy granted with respect to a defined circle of agricultural products.
The current domestic business federations also help ventures to find foreign
partners in their activities. Particularly the Chamber of Commerce  (Gazdasagi
Kamara),  the National Association of Entrepreneurs  (Vallalkozok Orszagos
Sz5vetsege,  VOSZ) and the National Unions of Industrial Guilds  (Ipartestaletek
Orszagos Szoversege)  endeavour to furnish entrepreneurs with information on
foreign trade and to mediate their interest to the government organisations. In
summary the institutional system supporting foreign trade serves small and me-
dium-sized enterprises without differentiation. At the same time there is a need
for founding an institution that expressly takes the characteristics of small enter-
prises into account and gives assistance particularly in the area of co-ordination
and information flows.
4.1.2 Directly supporting institutions
Despite the problems and contradictions the development of the institutional
system that directly supports small enterprises is continuous. Almost every day
institutions are established with a declared objective of supporting small and
medium-sized enterprises in some ways. Among the directly supporting institu-
tions there can be found that is explicitly oriented to small enterprises, and some
others, whose main profile is not supporting the small organisations, though re-
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lated to founding and operating them. In the following we will be focusing on
the institutions explicitly dealing with small enterprises.
4.1.3 Business federations
National Association of Entrepreneurs  (Vallalkozok Orszagos Szliyetsige,
VOSZ) was founded in 1988 when it separated from the Small Entrepreneurs'
Section of the Hungarian Economic Chamber  (Magyar Gazdasagi Kamara Kis-
willalkozoi Tagozata).
Presently it has a substantial membership: more than 5,000 members. Its
membership is heterogeneous, including near 2,000 work partnerships  (gazda-
sagi munkaldizasseg)  1,300 limited liability companies  (korlatolt felelassigii
tarsasag, Kft) private entrepreneurs, craftsmen, and other forms of business as-
sociations. The main goal of the VOSZ is to represent the interests of entre-
preneurs, to help in forming an entrepreneurship promoting economic policy
through all possible channels. It gives professional assistance to new ventures.
Now VOSZ operates 13 regional organisations and 14 professional sections. Its
activity beyond representing and enforcing interests includes financing ven-
tures, giving professional advice, and areas serving partner relations. For that
reason they organised an Entrepreneurial Credit Club  (Vallakozoi Hitel Klub)
whose members, given the existence of normal credit conditions, can get credit
from the Post Bank within 24 hours.
According to the agreement concluded with the National Insurance Com-
pany, members of VOSZ are preferred and receive a faster administration at the
insurance company. Presently the VOSZ represents the interest of both small
and large organisations, though considering its current activity it is rather an in-
stitution representing the interest of larger organisations.
The National Union of Industrial Guilds  (Ipartestilletek Orszagos Sziiyet-
sege,  IPOSZ) was founded in 1990, partly based on the previous interest pro-
tecting organisations. IPOSZ is an economic, professional, interest protecting
and representing union of professional Guilds founded by individual and joint
private ventures. In the first half of 1992 135,000 members of 286 Guilds join
to the Union. IPOSZ is a full member of the International Industrial Union
(Nemzetkozi Iparunio),  the International Association of Small and Medium-
sized Enterprises and the International Union of Craftsmen. The fundamental
objectives of the IPOSZ are to represent and to protect the economic and pro-
fessional interest of the individual and joint private ventures. Its basic tasks
include to propose state promotion for education and retraining, and to help to
ensure professional replacement. It endeavours to serve small enterprises with
business information. The regional organisations of IPOSZ endeavour to en-
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force the interest of small enterprises and to strengthen the economic policy suit
to small enterprises at local governments.
Informational agencies of the IPOSZ were organised at local govern-
ments. In the area of international relation they use foreign promotion mainly
for education and to renew professional training. To accomplish it the Intermer-
kant Educational Centre  (Intermerkant Oktatasi K5zpont)  was founded by
IPOSZ that educates, trains, retrains and gives information for craftsmen in se-
veral fields of business through its national network. IPOSZ also helps to fi-
nance small enterprises. According to the agreement concluded with Budapest
Bank (Budapest Bank)  the members of IPOSZ can receive credit on favourable
conditions at this bank.
The National Association of Retailers  (Kiskereskedlik Orszagos Szavetse-
ge,  KISOSZ) is an old interest representing organisation, its legal predecessor
operated in the previous regime, too. According to its objectives and activity it
is a traditional interest protecting organisation. The organisation and the activity
of the KISOSZ is similar to the ones of the IPOSZ from many aspects. KISOSZ
gathers entrepreneurs being in catering and retail industry, while the IPOSZ is
the organisation of craftsmen and artisans. The membership of the KISOSZ is
not compulsory any longer, at present it has about 40,000 small ventures in its
21 member organisation on a volunteer base. Beyond representing the interests
at the local level similarly to the IPOSZ it endeavours to represent the interest at
the national level, too.
The Chamber of Entrepreneurs  (Vallalkozoi Kamara)  was organised in
1990 mainly by associating smaller ventures. It does not have a legal predeces-
sor, it is an entirely new organisation.
There is ambiguous information about the number of its members.
Considering its activity the main function of the chamber is to protect the
interest of small enterprises now.
The National Association of the Hungarian Manufacturers  (Magyar
Gyariparosok Orszagos Sz5vetsege,  MGYOSZ) left VOSZ and has been ope-
rating as an individual organisation since 1991. The number of its members is
not too high, it hardly exceeds 100.
This organisation has a long standing tradition in Hungary, it already ope-
rated before World War II. Presently it was again reorganised as the interest re-
presenting organisation of private manufacturers.
The National Council of Industrial Co-operatives  (Ipari Szdvetkezetek Or-
szagos Tanacsa,  OKISZ) operated in the state socialist regime, the industrial
type co-operatives belonged to it. It follows the objectives and tasks of its pre-
vious practice, it has lost a lot of its importance. Currently 19 regional organisa-
tions and professional unions belong to OKISZ.
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The number of its members is about 2,000 co-operatives.
The Hungarian Agricultural Chamber  (Magyar Agrarkamara) was found-
ed in 1989 it is one of the most important interest representing organisation of
the individual and joint business enterprises working in agriculture. Presently
the Hungarian Agricultural Chamber has 40,000 individual members and about
1,000 joint business organisation having legal personality. It has several re-
gional and 11 professional organisations.
The National Association of Agricultural Producers and Co-operatives
(Mez5gazdasagi Termela es Szlivetkezetek Orszagos Szdvetsege)  was organised
as the legal predecessor of the National Council of the Producers' Co-opera-
tives. It has a long standing tradition, it took partly over the previous regionally
built organisational network, and has 22 member organisations. About 1 million
agricultural producers and 10-12,000 agricultural producers' co-operatives be-
long to it.
The National Council of General Consumers' Co-operatives  (Altalanos
Fogvasztasi Szovetkezetek Orszagos Tanacsa,  AFSZOT) assembles the old,Ge-
neral Consumers' and Marketing Co-operatives  (Altaldnos Fogyasztasi es Erte-
kesite:si Szovetkezetek,  AFESZ). It has a major, nation-wide organised network.
Presently it assembles about 300 co-operatives, though the number of ventures
linked to AFSZOT is substantially higher since close to 30 percent of the na-
tional retail and catering industry, and about 40 percent of the rural area link to
AFESZ.
The National Union of Farmers Associations  (Gazdalcorok Orszgos
vetsege)  was organised as a new organisation undertaking agricultural interests.
Building up its network is under process. Similarly the Society of the Agricul-
tural Small Producers and Entrepreneurs  (Meaigazdasagi KistermeNk es Val-
lalkozok Egyesillete)  and the Association of Agricultural Small Producers and
Co-operatives  (Methgazdasagi Kistermelock es Szovetkezetek Orszagos Szdvet-
sege)  are new organisations.
Beside these new organisations other associations and unions are conti-
nuously being formed with similar objectives undertaking the representation of
small enterprises, too. We do not have reliable information on their national
network-system and their membership.
The interest representation and protection was the privilege of some na-
tional organisations in monopolistic position basically organised at the sectoral
level in the state socialist regime.
Most of the time it was compulsory to join to them. Parallel with the le-
galisation of the Hungarian private capital, the appearance of the new entre-
preneurs and ventures, their spreading, and the differentiation of their interests,
most of the old interest protecting organisations transformed and numerous new
ones were founded beside them. Today the interest protecting organisations are
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
formed partly on sectoral, and regional base. Since some of them undertake the
general representation of the entrepreneurs' society as a whole, today we wit-
ness lots of overlap in many areas.
4.1.4 National business development funds and agencies
Almost every day funds and agencies dealing with different business develop-
ment are being formed in Hungary. So we cannot undertake to consider all of
them, only those of which activity is important on the national level.
The National Small Enterprise Developing Agency  (Orszagos Kisvedlal-
kozcisfejleszte:si Iroda,  OKFI) was founded as a government institution with na-
tional scope of authority in 1990. Its function is to hold together and to manage
the business development and vitalisation at the national level.
Its objectives include to do research, to prepare surveys and case studies
related to small enterprises. The Agency makes a proposal for the current ob-
jectives for long- and short-term policy promoting small enterprises, and it gives
opinion on Bills. It should be mentioned that with the lack of a comprehensive
business developing concept this type of work done by the agency is less ef-
fective. The Agency also makes proposals on the utilisation of financial funds
separated for financing small enterprises. It organises the information system
supporting businesses and gives assistance to business promoting foundations,
banks and financial institutions in their co-operation. It regularly prepares and
publishes different kinds of publications for entrepreneurs and ventures.
The OKFI organises the Club of Entrepreneur Houses  (Vallalkozollcizak
Klubja)  aiming at assembling the organisations dealing with business manage-
ment and entrepreneurial consultancy into a Union. Currently the Agency  is
working on to build up a National Entrepreneurial Information and Service Net-
work  (Orszagos Vallalkozoi Informacias es Szolgaltato Halozat).  Organising
and implementing the tasks related to the Existence Credit belong to OKFL It
accepts foreign government loans and elaborates the credit granting conditions.
The joining in the Working Group of Small Enterprises of the Pentagonal  (Pen-
tagonale KisveillalkozOsi Munkacsoportja)  is of high priority within the interna-
tional relations of OKFL The Council of Business Development  (Vallalkozasfej-
lesztesi Tanacs)  works by OKFI. The Council mainly assembles the organisa-
tions representing entrepreneurial interests, although numerous other organisa-
tions can be found among its members whose activity are related to promoting
enterprises. The major objective of the Council is to formulate a unified stand-
point with respect to ventures.
The last government of the previous regime founded the Hungarian Foun-
dation for Enterprise Promotion  (Magyar Vallalkozasfejlesztesi Alapitvany,
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MVFA) for the expansion of small and medium-sized enterprises. Its initial ca-
pital was 4.2 thousand million forints. Additional financial resources were
granted to it within the framework of the PHARE programme. In 1991 the a-
mount was 18 million ECU, and till the end of 1992 an additional 5.5 million
ECU can be expected. The areas of activity of MVFA are as follows: it manages
the credit programmes for small and medium-sized enterprises, within its
framework it grants not recoverable credits. It also actively participates in ma-
naging other credit constructions. It organises the foundation of Local Entrepre-
neurial Centres  (Helyi Vallalkozasi Kozpontok)  at the national level. Also the
intention is that the centres will deal with credit placing. It proposes and pro-
motes manager training and educational programmes, and consulting services.
It organises the foundation of incubator houses for the inexperienced entrepre-
neurs. The SEED Foundation  (SEED Alapitvany)  was founded in 1990 with an
initial capital of 20.9 million forints. With the promotion of the American
Government (100 thousand USD), the  Soros Foundation and the Mellow Foun-
dation,  it mainly helps the entrepreneurs just beginning. It offers an effective
help for the unemployed who tries to establish his existence in the business
sphere. The individuals, becoming entrepreneurs from being unemployed, are
financially promoted in their starting for 6 months by a not repayable contri-
bution that is equal to the amount of the unemployment benefit. The inexperi-
enced entrepreneurs are helped by training courses, free consultancy, and infor-
mation. The first incubator house was organised by the SEED Foundation and
it helps to build up the national network of incubator houses.
4.1.5 Entrepreneurs training'supports
Education and training should be mentioned within the institutional system of
promoting entrepreneurship. At the beginning of the transition to market econo-
my the first curriculums and entrepreneurs training programmes came from
western countries. They are mainly used in training courses and retraining pro-
grammes. Together with the change of regime the demand for teaching entre-
preneurial knowledge and training entrepreneurs within the framework of the
formal educational system appeared. It is still entirely absent from the basic
educational system. One can find attempts and experiments in some of the se-
condary schools. The four years of secondary school are amplified by entre-
preneur training courses after graduation at many places. These are qualifica-
tion giving courses, after graduation they earn a diploma as managing assistant
or clerk at banks. The current Hungarian system of vocational education is  in a
critical situation, the development of the new education system is in progress.
The interest protecting organisations (IPOSZ) try to help on the problems of vo-
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
cational education. Several local organisations of the IPOSZ support the region-
al educational institutions, in order to help their student to participate in foreign
professional training programmes. Presently the higher education tries to find
its possibilities for renewal. There have been successful initiatives in entrepre-
neurs training programmes at the universities and colleges. With the help of for-
eign universities the MBA training, the programmes of the Open University,
and other manager training courses enjoying the promotion of foundations on
different level started at several places. Different kinds of retraining program-
mes have been started with the support of the Ministry of Labour. There is  a
constant demand on the part of companies for manager training courses orga-
nised at universities.
The entrepreneurs' training is currently promoted by the following foun-
dations.
Fund for Vocational Training  (Szaklthpzesi Alap)  was founded through
1.5 percent compulsory contribution of companies and 1 percent of agricultural
co-operatives for the promotion of professional training.
The Employment Fund  (Foglalkortatasi Alap)  serves extension training
and retraining. Its resources from the state budget are supplemented by the com-
pulsory contribution of the employers by 1.5 percent and the employees by 0.5
percent. The promotion of the Employment Fund can be won through a tender.
The 40 percent of the Funds' resources is centrally used and 60 percent is
used in a decentralised way. There are no separate financial funds for training
and education related to developing small and medium-sized enterprises.
The entrepreneurs' training is also promoted by foreign financial funds
and foundations. The most important of them are the promotions of the World
Bank in that area, the promotion that is realised within the framework of the
PHARE programme, and the training and educational promotions given by fo-
reign governments.
4.1.6 Regional and local institutions
Most of  the above mentioned national institutions helping small enterprises
have regional network. These institutions mainly have operating centres in the
capitals of the counties or in larger cities. The regional and local small enter-
prise development shows quite a significant disproportion. The main reason for
that is that the distribution of the small and medium-sized enterprises is dispro-
portionate, too. At about 60 percent of the small firms are concentrated in the
Capital and the County of Pest, the others' distribution between Western and
Eastern Hungary is relatively balanced. Considering the distribution, however,
at the counties level significant disproportion can be found.
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The Act on Local Governments does not make it obligatory on the local
governments to support ventures, at the same time the local governments have
to undertake this activity in the long run. The initial steps and directions are cur-
rently taking shape. Presently the local governments rather concentrate on
furnishing them with local information and building up its network. It includes
from information on settlement development, and the practical questions of
founding business organisations to almost every problem of entrepreneurs.
Presently the task is incumbent on the administration. The promotions
and progression of small and medium-sized enterprises are of high priority in
the programmes of regional development. It appears in both the developing pro-
jects made for small regions, and the so-called crises managing programmes of
the larger regions in crises. The entrepreneurship promoting and serving local
institutional system, however, has just started to evolve in most of the small re-
gions. The local tax allowances can be considered as indirect entrepreneurial
support. In 1991 there were about 1,500 regulations levying local taxes, but
only one-third of it affected the entrepreneurs. Although the taxes were levied
rather considering the fiscal aspects of local governments than by the motiva-
tion of progressing entrepreneurship. The local governments do not place
enough orders to the entrepreneurs on market terms yet. This area of develop-
ment depends on central political decisions, since it is not yet decided whether
the local conditions of ensuring public utility services and public supply can be
privatised or not.
The entrepreneurs' profit tax allowance is due to firms operating in back-
ward areas, although it is 60 percent, it has proved to be insufficient. Consider-
ing the other items of taxation and the financing problems it does not speed up
both the expansion of ventures and the investments aiming at crises solutions as
it was expected.
The most often mentioned problem with respect to small and medium-
sized enterprises is the insufficiency or the lack of local infrastructure. The scar-
city of local resources does not allow to solve the problems at the given area.
Favourable results can only be found in developing telecommunication net-
work, however, it is still not enough to attract investors.
The local governments have the opportunity to gain financial resources
for developing enterprises by joining in the national tender system. Though this
opportunity is given primarily for communal and infrastructure development.
Arising from the economic reduction there are fewer resources available for de-
veloping enterprises. It is almost impossible to bring into being the local incuba-
tor houses, the entrepreneurial houses, the industrial innovation parks from local
resources.
There are only a limited number of local financial funds in finance, the
regional and local foundations (their number is significant) are unable to help to
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
finance the enterprises because of the lack of resources. The local small enter-
prises do not know about the foreign credit opportunities, and promotions. Most
of the related information can only be found in Budapest. The regional small
banks and the local investment funds are missing, though they could be a great
help in expanding enterprises in accordance with the local objectives and in
partly undertaking the problems of credit. The local governments are allowed to
promote the enterprises with real property or part of a house-property, but this
type of help is very rare. Founding the credit bank co-operatives of small savers
is still only a possibility since the legal conditions of it is given from this year.
4.2 The financing system of small and medium-sized enterprises
The currently operating institutional system of the money market, the two-tier
bank system was organised in 1987 in Hungary. The aspects of financing requi-
rements of the state and co-operative sphere were decisive in its shaping.
During the last years the bank system developed a lot, its organisation, operation
and services became more differentiated. Despite all of that, its structure is still
not suitable for serving the private business sphere that requires special money
and capital market conditions. Basically small enterprises primarily need initial
and starting capital. This would require such a financing system that consider-
ing the small savings could provide the enterprises with initial capital, supply
for later demands of expanding, and would be suitable for continuous financing
of working capital. The financing system does not yet meet these requirements.
The sphere of small enterprise has not yet become part of the banking activity
on business grounds. The above mentioned types of financing require different
credit devices and postulate the existence of lots of small banks and financial
institutions serving special needs, too. The current commercial banks cannot
carry out the differentiated services, and a well proportioned financial system
and the establishment of its structured institutions are still waited for.
So far according to the experiences it can be said that the smaller banks
meet the financing demands of small enterprises on a higher level, and they try
to take the special needs into account. The smaller banks are more flexible, can
easily recognise the local demands, and try to adjust their offer of credit to
them. Though it pertains to this that the claims of these banks include only a ne-
gligible stock of doubtful and irrecoverable debts inherited from the old state
sector, thus the inherited burdens do not make their business policy rigid.
The position of the larger banks is less favourable. They have lots of irre-
coverable and doubtful debts, their structure is inflexible, they were typically
founded with an orientation to large enterprises. The large banks do not have
experiences related to small enterprises, they often treat them with reservations.
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The feature of the Hungarian financing system of enterprises is bank-ori-
ented. It is particularly true for small and medium-sized enterprises. Virtually
the only way to obtain initial and additional resources for this sphere is to ask
for bank loans.
The sector of current private entrepreneurs and potential entrepreneurs do
not own significant properties that could be considered as capital, their savings
are negligible and as a result their own resource supply is on a low level. It be-
came typical (and probably stays in that way for a while) to finance enterprises
by credits in Hungary.
Currently the greatest problem of the entrepreneurial sphere is to launch
the business and to finance the first years of operation. The most urging finan-
cial problem is to find the investment resources for founding, and launching the
venture, and to ensure the initial working capital needs, later to maintain the
continuous liquidity and to find the resources for market creation and expan-
sion. It is particularly a major constraint for those enterprises that were orga-
nised for riskier activities ensuring later return in the manufacturing and pro-
cessing industry. This also plays a role in that up till now the small and medi-
um-sized enterprises were founded mostly in commercial and service indust-
ry that require relatively small capital investment and ensure fast return. It can
be said that today the creditors are dominating on the Hungarian money market.
There are numerous credit constructions available for enterprises including
smaller units, too. The significant number of constructions, the excess of credit
supply suggest that the business financing has been solved from the money mar-
ket side. After analysing the actual opportunities, however, the situation is very
contradictory. The small enterprise financing is not at all solved, though the
competition is a bit more vivid now in placing entrepreneurial credits.
The credit supply available for enterprises can be sorted according to the
followings: credits from the World Bank, and other foreign credit construction
based mainly on government agreements, privatisation credits promoted by the
Hungarian government, and other domestic credits.
The conditions of granting and applying for credits were determined with
respect to the credits and loans of the World Bank and other foreign credits by
the giving financial institutions, with respect to the privatisation credit by the
Hungarian government. To determine the conditions of normal small and me-
dium-sized entrepreneurial credit placing is the task of commercial banks. The
credit placing are generally characterised by the followings. Most of the time
the banks grant the maximum days of grace, the determination of the term and
the concrete conditions depend on the agreement concluded between the credit
grantor and the grantee. The rate of interest varies according to the credit con-
struction. The interest rate on credits that can be granted in foreign currency is
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fixed to the interest rate developed in the practice of the national money market,
with respect to the forint credits it depends on the actual basic interest of the
bank of issue, it follows the inflation rate. It depends on the type of credit con-
struction that what is the required rate of entrepreneurial share. It may range
between 15-50 percent. The entrepreneur has to provide collateral security for
the applied credit, the measure of it may be 100-200 percent. Currently to de-
part from it is very rarely allowed. One of the major problems is to provide the
collateral security and the question of undertaking guarantee. The banks require
differently detailed business plan depended on the characteristics of the con-
struction, and in some cases the presentation of the study of feasibility from
those applying for credits. It is still difficult to draft them for entrepreneurs. We
shall examine the most important credit constructions and their problems in the
following chapter.
4.2.1 Foreign credits
The general feature of the foreign credits is that they are business like, organised
charities are out of question. The number of credit opportunities and the amount
that can be granted are relatively high, the commercial banks cannot place them
all. Their basic characteristic is that they are firm-type, can be applied for both
in forint and foreign currency.
Generally these credits cover 85 percent of the value of goods, thus the
Hungarian importer has to have 15 percent own share at disposal. Promotion
type of construction can be hardly found among the foreign credits. The western
financial institutions effectuating the credit do not sign the contracts with the
Hungarian commercial banks, they do not consider them „appropriate" yet.
They enter into a contract with the National Bank of Hungary (Magyar Nemzeti
Bank, MNB), this means negligible risk for the foreign governments. This acti-
vity, however, does not belong to the MNB, since this activity is not included in
the activities of the bank of issue. These credit constructions are most favour-
able for the commercial banks, since there is no need for mobilising internal
bank resources.
They can obtain liquid capital by calling it from the bank of issue without
actually lending them out. These constructions are not really attractive for the
enterprises since most of it could be used only for purchasing in the given fo-
reign country.
The other obstacle is that the minimum amount that can be applied for is
too high for the Hungarian entrepreneurs, audits scope of use is very limited.
Practically there is no chance to obtain a medium-term foreign credit today. The
new-comer entrepreneurs cannot use the credits for building their company seat
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or to finance the current assets. Another peculiarity of the credit is that the
charged interest together with the other costs and fees superimposed on it,
makes it more expensive to obtain it in Hungary than in the country of origin. It
can be said that only few Hungarian entrepreneurs are interested in these con-
structions as a result of the numerous limitations and restricting factors. At the
termination of the foreign general contract only part of the available resources
could be lent out in the entrepreneurial sphere. In the near past they either pro-
longed the dead-lines or the negotiations are being carried on. Only 9-30 per-
cent of the import promoting amount was granted. Till the beginning of 1992
only 47 million DM were called in from the Bayern 250 million DM credit by
the commercial banks. The commercial banks called only 70 million DM from
the 250 million DM credit construction of the province of Baden-Wurttemberg.
The actual amount of placing is much less than that. An additional problem is
that the entrepreneurs have only limited information about these constructions.
The transit time of the credit construction is too long (3-4 months) for the small
enterprises. One of the fundamental reasons for the negligible interest is that the
credits are target oriented, they are linked to purchasing foreign investment
goods, meanwhile the potential entrepreneurs want to operate in the commercial
and the service industry. The most significant foreign credit opportunities are
the followings: the export stimulating credit granted within the framework of
the DI Structural Adjustment Programme provided by the World Bank. This
can be applied for by those business associations whose 30 percent of sales re-
venue comes from convertible export. The maximum amount is 776 million fo-
rints, and it requires 25 percent of own share. The credit can be used at the ex-
pense of the basic interest of the bank of issue and banking costs for 12 years
with a 3 year grace period.
The credits of the Inter Europe Bank-European Investment Bank can be
applied for practically any of the entrepreneurs, however, the joint ventures with
participation of Common Market partners are favoured. Minimum 20 million
HUF maximum 200 million HUF can be applied for with a 50 percent own
share, for seven years, with 1-2 year grace period, at 26-28 percent interest.
The Budapest Bank—IFC loans and quasi-equity construction is available
for private companies with majority share and co-operatives if they are not ope-
rating in the area of commerce, finance or real-estate business. It can be called
in forints or foreign currency with a 25 percent of own share, for 3-9 year term,
with a 4 year grace period, at the basic interest rate of the bank of issue plus
1.5-3.5 percent costs. The minimum amount in foreign currency is 100 thou-
sand DM, the maximum is 8 million DM.
Special employment promoting credit construction is available for the co-
untry's four counties in crises, practically all ventures pursuing industrial activi-
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ties can apply for it. The own share is 25 percent. It can be granted for maxi-
mum 10 years, with 3 year grace period at the basic interest rate of the bank of
issue plus 6-7 percent commission.
The special small entrepreneurial foreign credit construction is available
for small enterprises with less than 60 employees.
It is fortunate that in this case there is no minimum figure given. Maxi-
mum 11.7 million forints credit can be granted by 25 percent of own share, for
10 years with a 2 year grace period, at basic interest plus 6-7 percent com-
mission.
The entrepreneurial credit of the DG Bank Frankfurt „UNICBANK
Founds" is a special credit, only the Union of Confidence Guaranty can apply
for it. Only those enterprises can apply for it that can show two successful years
in business. Own share is not required, it can be granted for maximum 2 years.
There is no interest charge on it, only the charge of undertaking guaranty and a
minimal commission have to be paid. The available amount is 1 million forints.
The other major group of foreign credits can be used basically for pur-
chasing investment goods in the given country in accordance with the govern-
ment agreements. They function as import credits. The itemised presentation of
them is not possible within the framework of this study, thus we mention only
the important ones and concentrate on their common features. The most impor-
tant of the import credits based on bilateral agreements are the Finnish, Sweden,
Italian, Japan, Bayern, Canadian, French, British credit construction and of Ba-
den-Wurttemberg. The other group of import credits is provided by foreign
banks. The most important form these are the Swiss and the Belgian construc-
tion. The common feature of them is that it can be drawn on only to purchase
foreign investment goods by already operating enterprises. The joint ventures
formed with the participation of the investors of the given country are always
preferred. The available minimum amount is very high in all constructions, the
maturity is only a few years, ranges from 2 to 9 years, in many cases the grace
period is only a few months, the interest conditions follow the foreign interests.
These credits are also characterised that the foreign partner hardly ever under-
takes guarantee, the entire rate and business risk rest on the Hungarian entre-
preneurs.
4.2.2 Domestic credit opportunities
The commercial banks as a result of lack of internal resources grant entrepre-
neurial loans only for a year period for their own clients. This is included in
almost all of the financial institutions' activity, on condition that the client is
solvent, possesses the required collateral security, and is capable to pay off ac-
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cording to market conditions. These normal loans are almost unattainable for a
newcomer entrepreneur. The most favourable forms of domestic credits are the
constructions provided by government funds.
The Existence Credit  (Egzisztencia Hitel)  and the allowance of paying by
instalment should be mentioned on the first place among the domestic credits.
This privatisation promoting credit can be applied for by native private person
and their associations, co-operatives, and in addition the organisations founded
for the realisation of the Employees' Share Ownership Programme  (Munkaval-
laMi Resztulajdonosi Program). The conditions to obtain the credit are favour-
able, the interest rate is 60 percent of the given basic interest of the bank of issue
plus 4 percentage point. The required own share, the maturity and the grace pe-
riod are differentiated with respect to the amount of the credit. By this time the
conditions of applications are loosened but still the conditions of obtaining and
payment are hard on the entrepreneurs. It is favourable that by now state shares
can be purchased from E-credit, and the credit can be used for acquiring right of
tenancy, and the 50 million forints upper limit of credit application is abolished.
The restriction is, however, that the entrepreneur has to cover the costs and ex-
penditures of privatisation, additionally to insure the credit rest on the private
individual and not on the venture. An additional restriction is that the instalment
payment has to be paid from the after tax income.
The START Credit  (Start Hitel)  provides loans minimum 500 thousand
forints, maximum 10 million forints for new private entrepreneurs and firms
operating not longer than 3 years.
Extremely strict conditions are prescribed for obtaining the credit. Often
150-200 percent collateral security is required, a beginning entrepreneur can
hardly ensure it. The interest conditions are favourable, it is 75 percent of the in-
terest rate of the bank of issue, together with the granting commercial bank's in-
terest margin. This construction came into existence with the 100 million DM
promotion of the German Government with the addition of the same amount of
resources from the MNB in 1991. Last year they could place only 3.8 thousand
million forints. The reason for this is probably the high at about 30 percent own
share for the beginners, and the intolerable instalment payments. In the second
half of this year the demand for this credit construction has increased.
The reorganisation promoting credit and the interest subsidy can be ap-
plied for by transformed state companies or for purchasing the co-operatives'
properties being under bankruptcy- or winding-up procedure. Native private
persons and business associations with Hungarian majority can apply for it. The
structure of the construction is similar to the credit placing on money market.
The financial institution determines the maturity, the interest charges, the mea-
sure of own share. The credit can be obtained on competition, the entrepreneur
can choose from different conditions at formulating the measure of the interest
subsidy.
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The National Technological and Development Council  (Orszagos Masza-
ki es Fejlesztesi Bizottsag,  OMFB) grants promotions aiming at innovation to
entrepreneurs qualified solvent by commercial banks from the central financial
fund on normal money market conditions. The OMFB undertakes 50 percent of
the interest charges in this construction.
The commercial banks grant credit aiming at export stimulation for the
solvent clients within the framework of Export Stimulating Tender System. The
70 percent of the resources needed for the credits are refinanced by the MNB.
This credit granting is oriented around a limited circle of entrepreneurs.
Only export is accepted as performance, it is a condition that the return on
investment should be realised within 5-10 years.
Other promotions can be obtained beside this credit, thus promotion for
R+D activity from the Technological Development Fund, also exemption from
paying given interest charges can be applied for, and tax allowance can accom-
pany this form of credit.
The micro credit programme of the Hungarian Business Development
Foundation  (Magyar Vallalkozasfejlesztesi Alapitvany mikrohitel programja) is
a typical small enterprise promoting construction. This credit can be obtained by
enterprises founded not earlier than 2 years, with less than 10 employees and if
the initial capital of the firm does not exceed 1.5 million forints. Maybe this is
the only construction that helps to finance the operational problems of small en-
terprises, since it can be applied for without own share for a relatively short ma-
turity (minimum 6 months, maximum 3 years). It is a complex credit form since
it includes loans and subsidies simultaneously. Currently it can be only applied
for in the six Regional Entrepreneurial Centres of the country.
We should mention among the domestic credits the credit opportunities
linked to the membership of interest representing organisations. Unfortunately
up till now there are only two favourable constructions like that in Hungary.
One of them is linked to the membership of VOSZ. VOSZ members can gain
credits within the framework of the Post Bank and VOSZ Entrepreneurial Cre-
dit Club construction. The credit conditions follow the actual money market
conditions of short term placing. The other similar construction is the joint cre-
dit of the Budapest Bank and IPOSZ. The members of IPOSZ can quickly get
credit for 6 months on the terms of the interest conditions prescribed for short-
term credits.
Considering the previous things it can be seen that the financial promo-
tion of the ventures is not yet solved in Hungary, only the framework of the in-
stitutional system is suitable to serve effectively the money market financing of
private capital. The fundamental operational conditions of the two-tier bank sys-
tem and its institutions are given, but the other financial institutions are missing.
There are deficiencies in numerous areas. There are only a few offers of credit
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
that would effectively serve the short-, the medium-, long-term financing of
small and medium-sized enterprises. The money market financing of starting a
business imposes unbearable burdens on entrepreneurs. All the credit expendi-
tures, the risk, the undertaking a guarantee to ensure the collateral security are
all on the entrepreneurs. There is a need for more institutions, financial funds,
that provide interest promotions and would undertake the interest and the rate
risk. There is also a need for longer grace period, and more favourable payment
instalment accounting. At most of the credit construction the financing expendi-
tures can set against the after tax income. The government is working on the
elaboration of the credit guaranty system. This year the General Guaranty Fund
and the Small Entrepreneurial Guaranty Fund will come to existence, and their
central institution, the Entrepreneurial Credit Guaranty Corporation is being or-
ganised.
According to the plans the institution would undertake guarantee for 80
percent of the granted credit with objectives determined by the banks.
An additional problem is that the financial institutions in charge of the en-
trepreneurial capital fund and the ones dealing with small investments are ab-
sent from the money market. The Hungarian Investment and Development Cor-
poration as a centralised institution is not capable of effectively financing enter-
prises. The regional and locally organised small banks and financial institutions
are also missing. The local governments do not play almost any role in financ-
ing local enterprises. It Deeds to be mentioned that some of the sectoral minist-
ries have not yet built their regional network, their business, service and infor-
mation system. These, however, could effectively help the local enterprise deve-
lopment by furnishing them with information, and granting and distributing cre-
dits for investments, developments related to local programmes. The regulato-
ry system is also a barrier of effective financing. The transit time of an actual
development credit is so long that by the time it is used and the payments are
made the regulations mainly the stipulations of taxation might have changed
more than once.
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
5 ENTREPRENEURSHIP AND REGIONAL POLICY
IN HUNGARY
5.1 The regional dimensions of the crisis
The effects of the economic and social crisis in Hungary can be detected in all
parts of the country; they force a modification and revaluation of the develop-
ment fundamentals. The consequences of the crisis manifest themselves in dif-
ferent ways in different structures. In regions with weak structures and in mono-
cultural settlements, new types of regional phenomena — like unemployment
and impoverishment — are the results of economic stagnation or decline. De-
pressive processes — showing social and economic decay — have emerged owing
to developmental problems in certain sectors and management deficiencies in
industrial regions traditionally considered to be developed. The worsening of
the economic conditions within the agricultural sphere has led to the develop-
ment of stagnant agricultural regions. The income-producing ability of the pro-
ductive sectors has gradually decreased, occupational forms like these have lost
their former potential to develop the region and the settlement. Lacking re-
sources and a consistent conception economic policy, developmental projects
for the underdeveloped areas are of little effect.
The growth of problematic regions of the country has come to a turning-
point. The course of regional and settlement development has arrived at a dead-
end. The answer to this crisis situation is to establish a modem economy to
transform the economic structure. In the last decades, it was typical for the poli-
cy of regional development in Hungary to try to restrain the inequalities to an
extreme extent. The level above which inequalities were considered to be unde-
sirable, excessive, unjustified, politically inequitable, etc. was determined diffe-
rently from time to time and a gradual moderation and suppression of the ine-
qualities was aimed for. The regional cross-section or level where the regional
policy thinking and activity were conscious of the inequalities and tried to mo-
derate them was similarly changing. There was a constant striving after the re-
duction of the differences between the various counties, once embedded in the
system of large territories (regions), at other times the base of comparison was
made up by the diverse development of capital—country, village—town, and in-
dustrial and agricultural regions.
Apart from partial transitory results, none of these efforts achieved overall
success and, with the decline of the socio-economic environment and the deve-
lopment of the crisis, enforcing a structural change in the economy and the reor-
ganisation of the political system, the inequalities increased to a great extent and
a territorial polarisation could be observed.
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
There were four basic processes — each one creating regional crisis in its
own right — intertwined and having their effects at the same time:
• the problem of the historical expansion of disadvantaged regions, the
ever increasing backwardness of rural areas and finally their falling be-
hind, and the inability to develop in rural and agricultural regions with-
out centres;
• the transformation of the role and market conditions of certain produc-
tive sectors especially in those cases when these sectors played an im-
portant role in the economic structure of a region and there was a need
for radical changes in the regional economic structure; a good example
of that are regions with the dominance of heavy industry, the crisis of
classically depressed regions;
• the rapid collapse of the economic systems of Eastern Europe and the
new economic orientation to the world along with the extension of mar-
ket relations have plunged the whole Hungarian economy, and within
that the various regions, in different ways into a critical state;
• the change of the organisational and functional structure of the economy
as a result of the change in the social-economic system, which, on the
one hand, is determined by the change in the ownership (privatisation),
on the other hand, by the'reorganisation of the economic organisational
system, the selective disintegration of the formerly dominant large in-
dustrial system, the establishment of small and medium-sized compa-
nies at a rapid pace, and the spreading of enterprises.
The most obvious outward form of regional crisis is unemployment, with
the necessary contraction of the state sector as its determining cause. As a result
of the regional division of large state industry and the regional unevenness in
the progress of the economic structure, sharp social tensions caused by unem-
ployment can be observed mainly in the eastern parts of the country (the Great
Hungarian Plain having low-level technologies and industrialised through facto-
ry resettlements from Budapest in the sixties) and in the north-eastern centres of
heavy and extractive industry (Miskolc and surroundings). In November 1991,
the national unemployment rate came to 7.3% (351,000 unemployed), in the
eastern regions of the country it was 10-14%, in the western areas it was 4-7%,
and in Budapest it amounted to 2.4%. (Unemployment has spread quickly: in
January 1990 there were 23,000; in January 1991, 100,000; and in June 1991,
there were 186,000 registered unemployed in Hungary. The pace of the increase
was seventeen times higher at the end of 1991 than at the beginning of 1990.)
The general crisis of the state sector meant a basic alteration of the state
labour market in Hungary. As a result of the decrease in the production and the
number of workers in industry (and the spreading of small and medium-sized
companies to be dealt with later on), there have been three regional types to be
outlined.
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
In the central regions (Budapest and the counties around the capital), state
industry has contracted and the private economy shows a strong development,
there is deep organisational slump in the eastern parts of the Great Hungarian
Plain and in north-eastern Hungary, while other regions of the country find
themselves in a transitory situation (which of the previous two groups they are
going to join is not clear yet).
In Eastern and Central Europe — owing to historical misfortune — the de-
mand for three basic changes has accumulated in the past one and a half decades
(Enyedi Gy.,  1990). Firstly: with the completion of the industrialisation, there is,
a transition into the post-industrial phase, which took place in the sixties in
Western Europe, at the time of the prosperity of world-economy.  Secondly:
there are changing structures and technologies, which the economy proved to
be absolutely incapable of.  Thirdly:  the socio-political change in the system
in the former socialist socio-economic model repressed the development of the
forces of production.
The economic reorganisation is made difficult, however, by the fact that
all these significant changes have to be carried out simultaneously. The macro-
structural change of the economy has to take place at the same time as the tech-
nical-technological and organisational modernisation of the industry. All these
are to be realised in a period of time when:
• the growth rate of the economy has decreased, there is a continuous de-
cline in the economy,
• the effectiveness is extremely low, there is a wasting of economic re-
sources,
• a big part of the population has become poor, the social polarisation ex-
ceeds the degree typical for market economies,
• there is open inflation,
• unemployment and the external and internal debt have increased,
• regional disparities are growing rapidly.
Although there have been several concepts formulated on the moderni-
sation of the Hungarian economy and society, and they show essential diffe-
rences as to their political or economic-philosophical affiliation, they still have
something in common, namely that they all assign an honoured role to the small
and medium-sized companies in the process of the structural change of econo-
my and the creation of the property relations in Hungary.
In the countries of Eastern and Central Europe fundamentals necessary to
the economic development of small and medium-sized companies — and to the
framing the market conditions — differ from each other to a great extent. The
course of development is different from those of Western-European countries
because of peculiarities of the historical background, while Hungary's special
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
position within the East European bloc is due to the heterogeneous effects to the
reforms started more than twenty years ago. The experiences of the semi-mar-
ket solutions facilitate the transition of the market economy in Hungary; how-
ever, the shortage of capital, the accumulated tasks of modernisation, and the
flexible political conditions show various alternatives for development. The fast
development of the small and medium-sized company sector will probably lead
to economic, regional, and political decentralisation.
5.2 The development of the economic organisational system
In the history of the modern Hungarian economy over the past one hundred
years, a particular dichotomy of the big industry and the small-scale production
can be observed. At the end of the 19th century, the manufacturing industry
started from a weak basis and then developed rapidly. This process led to the
success of heavy engineering. While in 1880 only 21% of all industrial workers
worked in big industry, at the turn of the century this figure was 40%, and in the
1910s more than 50% of the 563,000 industrial employees were involved in it.
A high level of concentration was typical for the manufacturing industry. More
than one third of all employees were to be found in 4% of all the factories.
More than half of the workers in big industry were employed in factories with
21-100 and above 1,000 workers. The category of the medium-sized company
was missing. Besides the organic development of industry, there was a great
need for industry to produce consumer goods.
In the new situation after World War I — the territory of Hungary was re-
duced by two thirds, its population was decreased by 60% — the level of con-
centration reached at the beginning of the century was basically not changed.
The number of medium-sized factories, missing at the beginning of the century,
had increased in this period through the establishment of several textile, paper,
and other kinds of factories. Forty-five percent of industrial workers were em-
ployed in small-industry and they produced 28% of industrial output. Seventy
percent of small industry production came from the clothing, food, and build-
ing industries and the catering trade.
The preparation for World War II — the war-boom — extended not only to
the manufacturing industry but to small industry as well. The war production
meant economic strengthening for small industry, too; its share in the industrial
production, however, decreased in 1940 to 25%.
In 1945, the level of production of the manufacturing industry was about
one fifth of that before the war; in 1946, it was little more than one third; and in
1948, it had attained again the level of in last year, before war. In the very same
year the fundamental transformation of the Hungarian organisational system of
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
the economy was started: ownership competence. This process went on for two
years and sealed the further development of the Hungarian economy, for four
decades Hungary was separated from the modern European trend.
The establishment of the socialist sector was started with the Act XXV of
1948, according to which all industrial, transport, mining and smelting compa-
nies, and power stations with more than 100 workers that were privately owned,
during the time preceding the existence of the act went over to state ownership.
Six hundred companies were involved in the nationalisation, 83.5% of all work-
ers of the manufacturing industry became employed in the state sector. All
heavy industry companies were nationalised but only 25% of the workers in the
textile industry (13% of them in the leather industry), and 55% of the emplo-
yees of the food industry stayed within private companies. At the end of 1949,
industrial companies having more than 10 workers went over to state ownership
and some industrial branches were fully nationalised. Two thirds of the foreign
trade, the whole branch of wholesale trade, and the retail trade for its main part
went over to state ownership.
One of the most significant changes of the economic organisation system
was the increase in the concentration of the production. In 1950 there were
1,427 industrial companies and in 1965 only 839. The average staff number in-
creased from 336 to 1,183 in 1950. Less than 30% of all workers were employ-
ed in industrial companies with less than 500 workers in 1950, while in 1965
only 10%. At the same time, large companies with more than 5,000 workers
employed 35% of all workers compared to 17% formerly. This kind of concen-
tration — coupled with regional concentration (even at the end of the sixties,
44% of all industrial workers were employed in the agglomeration of Budapest)
— was for the most part only the result of organisational changes and the steps
of centralisation, and not of real concentration processes.
The economic reform introduced in 1968, the moderation of the central
planning system, and the growing importance of company independence in
Hungary put an end to the growth of factory and company size, and it even
started the process of decreasing size. Although in the mid-seventies — due to
the pressure of the Stalinist groups in the state party — there was additional
growth in the size of firms in the manufacturing industry, at the end of the se-
venties with the strengthening of the Hungarian economic reform, a slow and
gradual process of the decrease in the proportions of companies and factories
occurred. Through government measurements, following the demands for real-
ism, some monopolistic organisational blocks were abandoned. Decentralisation
first took place in the food processing industry, then in some other branches of
industry, too. The new perspective gained more and more importance in the
modernisation of organisational system as they gradually tried to do away with
the conservative traditions of the past and align the system to a market econo-
my. The decentralisation measurements of the government, however, reflected
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
the viewpoints of the company proportions in the late seventies and early eight-
ies. Economic autonomy and the development of entrepreneurial ability were
neglected issues.
It was those years when the so called second economy, a working activity
not socially organised, had started to spread in the deeper streams of the econo-
my of the open society. In this process, the Hungarian agrarian model played
the leading role.
The Hungarian network of agricultural co-operatives was basically dif-
ferent from the East-European kolhoz type
-
system in that — and this being so the
Hungarian system found itself in the cross-fire of ideological-political attacks —
there was a particular division of labour between the big agricultural companies
and the household farming and auxiliary economies (activity carried out on a
piece of land in private ownership, or rented). At the beginning of the eighties,
70% of the vegetable production (horticulture), 51% of the fruit production,
21% of the cattle population, 52% of the pig population, and 40% of the poultry
population came from household farming and auxiliary economies. More than
the half of small-scale producers were integrated in agricultural co-operatives
and two thirds of the commodity production of the small-scale producers got to
the consumers and reprocesses in an organised form.
The demand-increasing role of the second economy, along with the rise in
living standards, also became obvious in other sectors of the economy (services,
trade, construction industry): at the end of the seventies, only 30% of the repair
services were „socialist" organisations. The judgement of the second economy
was to be characterised by the sense of reality and the comparison with interna-
tional tendencies.
5.3 Enterprises immediately prior to the change of the political system
There were certain traditions of enterprising — economic activity performed out
of the framework of socialist organisations — at least in „buds" that were deve-
loped by creating suitable legal rules.
Setting up a legal framework for the collective forms of small ventures,
the political leadership of that time was trying to create an escape (unsuccessful-
ly) that world release the expected social tensions. In this way, they intended to
provide opportunities for almost every strata with political importance to find
some compensation for the unavoidable decrease in the living standard through
having secondary employment in some kind of enterprise form. There was nei-
ther time nor energy to establish the ideological basis for these major changes
and to reveal their long term consequences.
The package of decrees, announced in the autumn of 1981, performed the
legal regulation of the forms of collective enterprising listed below. They were
free to operate from the 1st of January, 1982.
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
s Economic working community: they could be formed as specialised enti-
ties of civil partnership, on the basis of registration with the Court of Re-
gistration, followed by a council-licensing procedure. There had to be at
least two and not more than thirty members of the venture. They had so-
cial insurance and worked as full- or part-time workers. The co-operative
could give work to employees, too, but their number was not to be more
than 50% of all members. The co-operative paid 3% company tax.
s Enterprise sponsored working community. In addition to the regulations
-
for the work team associations, they were subject to the joint and several
liability of companies.
s Small co operatives. They were formed on a voluntary basis, willingly, as
-
ventures organised „from below" with at least 10 and a maximum of 100
members. They had some advantages as to the regulation (for example
exempt from the wage-regulation) when compared to traditional co-ope-
ratives.
s Specialised group of a co operative for industrial activities and services.
-
It could be formed on the basis of a resolution of the general assembly of
the ,mother-co-operative". It had to have at least five members, but there
was no limited maximum number of associates. The main purpose of cre-
ating this kind of venture was to provide opportunities for the agricultural
co-operatives with disadvantageous conditions. The industrial production
had a higher profit-rate this way.
The companies were free to create subsidiaries and small companies be-
sides the working-pools in order to unbind the overcentralised structure. They
never became general, however, in spite of granted favours in wage-control, ta-
xation, and registration because of the weak motivation of large companies.
In short, we can say that these forms of collective enterprising caused im-
portant changes considering the Stalinist kind of economies of the East-Euro-
pean countries. The process of decreasing the economic role of the state, how-
ever, had no real success, not even in Hungary, which was due to the following.
s The conservative left-wing political-ideological pressure against the small
ventures remained effective as late as 1989: they were still afflicted by
many administrative restrictions, and got only a small amount of real sup-
port from the economic policy.
s The privileges of state-ownership were not decreased significantly and
state ownership had a paralysing influence on the non-state-owned com-
panies, too. The new period of the enterprise-boom in Hungary started in
1988 when the demolition of the constitutional and legal obstacles to the
private sector began. The Company Act of 1988 opened the way to Hun-
garian civil progress. This Act:
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
• helped smaller ventures to become middle-sized plants because the ma-
ximum number of employees (in the private sector) was raised from 30
to 500,
• provided an opportunity for private individuals and legal entities to
form joint ventures in certain enterprise forms,
• initiated the new institutions of the limited liability company and the
company limited by shares, in which the responsibility of the owner
was restricted to the invested property,
• legalised the institution of silent partners, in this way, joining a compa-
ny with capital only had become legal.
The Act on Foreign Investments of 1988 facilitated foreign investments
in Hungary. The former concession system was terminated, 100 percent foreign
ownership became possible and tax preferences were offered to joint-ventures.
The Act on Transformation, which came into operation in the middle of
1989 made it possible for certain small ventures to choose a more up-to-date
company form and solved the problem of the expansion and transformation of
small ventures (e.g., working communities could be transformed to limited
companies flexibly, fast, free of charge, and with no liquidation, without paying
taxes or dues). The Individual Entrepreneur Act of 1990 terminated most re-
strictions concerning small-industry and private trade, and used the principle of
the activity-importance: the rules of the official and qualification licensing were
connected with the activity and not the enterprise form. The Act on Issuing Se-
curities and the Act on Exchange, both in 1990, terminated the minimum value
of the shares and legalised the operation of private individuals at the Stock Ex-
change Market in Budapest.
Although the advantageous legal changes were not accompanied by an
adequate decrease in state tax-payments, a new wave of company formation
emerged in Hungary. The number of companies almost doubled between 1989-
1990 (Table 1). The most dynamic increase took place in the field of limited
companies, their number quadrupled.
It was characteristic of the great „establishing fever" that 42% of the com-
panies functioning in 1990 were formed in 1989-90, 32.1% of them were 2-5
years old, and only 25.9% of them were older than 5 years.
In this sudden increase of new ventures, it was the small organisations
which played the most significant role. They kept a simplified double-entry
book-keeping system, and their yearly income mounted from 25 to 250 million
Ft (300,000 — 3 million USD). At the end of 1990, more than three-quarters of
all ventures were small companies. In the material respect, a small company had
23 employees on average, a capital of 9 million Ft (120,000 USD), and a profit
84

Hrubi, László – Kraftné Somogyi, Gabriella  •
: Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.

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85

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
of 28 million Ft (380,000 USD). The increase of the importance of the small
companies is also indicated by the fact that at the end of 1990, 45% of industrial
companies had less than 20 employees (this number was 55% in the construc-
tion industry, 77% in internal trade, and 88% in foreign trade). Two thirds of
the industrial companies had less than 50 employees.
The Hungarian economy had this kind of organisational structure as de-
scribed above when it stepped on the path of changing the political and econo-
mic system. The liberalisation of the economy, the evolution of the economic
background (advantageous to the private sector), the rearranging of the organi-
sational structure (in accordance with the market-economy) the strengthening of
private companies, and the disintegration of the state-owned sector were just
about to begin. At this stage of transforming the system, quick economic growth
is not to be expected because the development of the new ventures is balanced
by the loss in the national economy. The leading branches of the economy are
depreciated almost to zero because of the change to the market economy and the
pressure to integrate into the western type of economic system. Some of the
large-scale industry has lost its values, the large-scale forming system has been
shocked, and the neglected information and communication infrastructure is an
obstacle to the spreading of new enterprises.
•
5.4 The regional location and diffusion of new enterprises
As already mentioned in the first chapter, there are two new factors determining
the territorial structure of the Hungarian economy: company size and form of
ownership. The former factors, such as sectoral-structure, export-ability, organi-
sational dependence, and the state of technology still have their influence. The
capital—provincial dualism appeared in the mid-eighties: 50% of the enterprises
operated in the capital (but only 19.4% of the national population and 21% of
the industrial employees are to be found in Budapest).
The strong territorial concentration lessened a little in the late eighties, but
even in 1990 almost half of the most dynamic companies were located in Buda-
pest and one tenth of them were to be found in the agglomeration of the capital
(Pest county). Only the number of the individual enterprises was in proportion
to the population structure because many agricultural ventures were settled in
the country (Table 2).
Examining the company density factor we can establish that Budapest and
its agglomeration has similar importance. Regarding the number of economic
associations per 10,000 inhabitants, the country average is 18.7, in the agglome-
ration of the capital city it is 18, and in Budapest it is 46.4.
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 2
Share of the economic organisations by counties, 1990
State enter-
Unlimited
Economic
Individual
County
prises and
and
Total
associations
entrepre-
co-opera-
deposit
neurs
tives
partnerships
Budapest
32.4
48.2
32.6
22.7
24.1
Baranya
4.7
2.7
3.2
5.2
4.9
Bacs-Kiskun
4.4
3.7
4.7
5.4
5.3
Belces
3.1
2.1
2.4
3.9
3.7
Borsod-Abdij-Zemplen
5.3
3.8
5.8
5.2
5.3
Csongrad
3.6
3.2
3.7
5.2
5.0
Fejer
3.2
2.7
3.2
4.6
4.5
Gyor-Moson-Sopron
4.5
3.2
3.8
4.5
4.4
Hajdii-Bihar
3.3
2.6
3.6
4.6
4.5
Heves
2.4
1.9
2.8
2.9
3.0
Jasz-Nagykun-Szolnok
2.7
1.7
2.5
3 7
3.4
Komarom-Esztergom
2.3
2.9
2.8
2 2
3.3
Nagrad
2.0
1.3
2.1
1.9
1.9
Pest
6.7
8.8
8.5
10.3
10.0
Somogy
3.6
2.3
3.0
6.7
6.3
Szabolcs-SzaIrair-Bereg
3.6
2.4
4.4
4.4
4.5
Tolna
2.1
1.4
2.6
0.9
1.0
Vas
3.6
1.5
1.8
0.8
0.9
Veszprem
3.7
2.1
3.4
2.1
2.2
Zala
2.8
1.5
3.1
1.8
1.8
Total
100.0
100.0
100.0
100.0
100.0
Source: Gazdasagstatisztikai Evkonyv. 1990. pp. 32-35.
The dominance of Budapest comes from different factors. The city has
always pioneered types of social innovation in the country. Forty percent of
state industry has its headquarters in the capital city, and state industrial enter-
prises have attracted the workers' business associations. The city offers the larg-
est and most affluent consumer market in the country. The city almost monopo-
lised the economic and political information which was necessary for getting in-
to business. Finally, partly because of the size of city, the control of the political
leadership over its economy has been less direct than in any other settlement.
Simultaneously, the spreading of private companies has begun, imitating
the classical model of expansive diffusion, and the number of enterprises has in-
creased in the western counties significantly. According to certain data, how-
ever, the main directions of the expansion are the Vienna-Gy6r-Budapest and
87

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
the (Trieste)—Lake Balaton—Budapest axes. The central and the southern part of
the country is less affected by this change. In the north-eastern peripheral re-
gions of Hungary, the company-density is rather low. (The density index in the
most underdeveloped counties is: 8.4 in Szabolcs-Szatmar-Bereg, 7.7 in Jasz-
Nagykwa-Szolnok, and 9.7 in Borsod-Abailj-Zemplen, which used to be the
centre of the former heavy industry.)
The counties situated west of the Danube river find themselves in an ad-
vantageous geopolitical situation. They joined the European regional co-opera-
tion in the mid-eighties (Alps-Adria Working Community, Co-operation of Re-
gions along the Danube). The numerous small and medium-sized towns of this
region make it an excellent target for foreign joint-ventures, while the eastern
part of Hungary has been afflicted by the collapse of the Comecom market.
The present regional rearranging of the economy draws attention to se-
veral problems, mostly overshadowed nowadays. Above all, the market-econo-
my should be developed on the regional level, too. The capital, manpower,
goods, and information market exist only in the capital city, the market institu-
tions are underdeveloped in the country (even in the six large cities of Hunga-
ry). Consequently, the country needs a regional policy which is based on the
drawing force of the diversified market and not on the unified model of ex-
tensive growth. This policy should help the organisation of regional and local
money-markets and use the various implements of „enterprise intensification".
The present tendencies suggest that in some western counties certain re-
gional progress is to start in the near future. This means a western-type develop-
ment based on small and medium-sized companies and changing the techno-
logy and the production structure, aiming at the third sector of the economy.
This process, however, requires an economic policy advantageous for entre-
preneurs, a decentralised power structure, and developmental conceptions i-
nitiated regionally.
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
6 REGIONAL STRUCTURE AND RESTRUCTURING
PROCESSES IN BARANYA COUNTY
The socio-economic model that prevailed until recently in Hungary and the
other East European countries was characterised by a policy of extensive deve-
lopment focusing on quantitative growth. The structural concentration and cent-
ral, state control of both the society and the economy was very strong. Conse-
quently the system of political and economic decision-making was also centra-
lised while the production and redistribution of incomes depended on central
(state level) distribution. The development policy of this concentrated structure
and centralised decision-making system had a unified and strong set of priorities
mainly representing macro-level and sectoral interests and paid very little
attention to regional expectations and characteristics. This kind of policy quite
naturally resulted in a polarised regional structure with advantages accumulating
in some areas (primarily in the towns, industrial centres and particularly in the
capital) and increasing disadvantages in others (like rural, agrarian areas). It
must be pointed out, however, that most of the accumulating advantages were
strongly relative, deriving from and serving, at the same time, the prevailing
structure and mechanism.
As it turned out later, the existence of the more highly developed areas
also depended on a very frail foundation; the key element of our development
policy was industrial growth concentrated in some priority towns or regions
which acted as poles, also determining the development of the third sector. As a
result, we have several regions in the country with significant industrial bases.
At the same time, industrial development in some areas was uneven, one-sided
or restricted to a couple of large companies, in this way making the region and
the development of industrial potentials too strongly dependent on them. There-
fore these „poles" of development are best described by uneven regional struc-
ture, exaggerated concentration of capital and organisations, lack of market
forces and relations, low adaptiveness to and interest in changes.
There can be no doubt that all this was not only and primarily the result of
a distorted regional policy but the materialisation of the general economic
mechanism (model).
The relativity of regional advantages and the seriousness of disadvantages
suddenly came to light in the mid-80s; both external and internal factors played
a part in the revelation of the socio-economic crisis. This new situation was
created by factors like the second wave of the Hungarian economic reform, the
enforcement and real operation of market relation (strict monetary policy, the
introduction of the new tax system, a more active exchange-rate policy and a
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
series of restrictive measures), as well as the recognition that the change of the
economic system was inevitable. When mining, metallurgy and the heavy in-
dustry in general got into a crisis, the areas previously acting as „poles" of deve-
lopment suddenly became depressed areas.
The decrease of production could not be avoided and opening new jobs
for the unemployed became a dramatic regional and sectoral issue: sectoral, be-
cause capital and labour should be streamed into new or already efficient sec-
tors, industries and regional, because the elimination of loss-producing activities
takes place at different rate in the various regions and the mobility of the popu-
lation is very limited (housing problems, lack of infrastructure in areas that, in
principle, could take up more people).
The present study focuses on structural changes in the economy taking as
an example Baranya county and the determinant region (core area) in it located
around the towns Pecs and Komlo.
6.1 Regional economic structure of Baranya county:
signs of depression
When giving an overall picture of the economy of Baranya three characteristic
sectoral features of the structure can be pointed out:
• the mining industry has a determinant role,
• it is a traditionally agricultural area,
• light industries and food processing are significant beside the mining
industry.
With knowledge of the present economic and market conditions these
three characteristics themselves make it evident that the economic potential of
the area may get into a critical position. If to the above mentioned things we add
that the agricultural sector is a dominant economic base in an area where condi-
tions of productivity are unfavourable on the two third of the county's territory,
and industry is considerably concentrated in the Pecs—Kom16 area, which is the
„core area" of the county, then we get a relatively precise picture of the problem
in the county's economic structure, and the pressing necessity of the structural
change.
As a result of prevailing economic policy priorities, plans for regional and
urban development have so far regarded Pecs and Komlo, as well as the sur-
rounding settlements, that is the conurbation of Pecs as the engine of the coun-
ty's development, because of concentration of economic resources and income
deriving capacity of the productive sectors, and that the diffusion of these pro-
ductive forces can kick-start the economies of the county's microregions. Eco-
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
nomic policy courses in the four decades of socialist development encouraged
these efforts, even justified them, insomuch, that the average income of people
living here far exceeded the national average. These facts, as well as other sta-
tistical data could cause it fo be forgotten that there was a danger in the foresee-
able future of collapse of the regional development based on the mining indust-
ry and declining sectors of world economy and that a well-considered structural
change is necessary. This danger, otherwise, was pointed out by researchers in
the mid-seventies when they saw the social and economic decline of the de-
pressed areas in Western Europe.
At the beginning of the eighties indications of the regional crisis in-
creased. The radical falloff in the dynamics of the productive sectors, and the
slowing down of economic growth became a characteristic trend, particularly in
the county of Baranya. Whereas in the period between 1973-1978 the producti-
vity dynamics in Baranya was 116.3% (lowest among the counties), at the be-
ginning of the eighties between 1979-1984 a fall-off in production was noticed.
The 94.7% index was second in the counties' league behind the production fall-
off in Budapest's industry. The 2.7% uplift in 1987 proved to be only a passing
tendency of the decade, in 1988 a 4.3% slump took place, and at present the
production volume of the industry is by one sixth less than in 1980.
Different indices of the industrial net output also foreshadowed the unfa-
vourable positions of the county's industrial potential. These indices were below
the national average. (2.8% of the national income was produced by Baranya
county in that time.) The index of industrial development (net output value per
person) was 69% of the national average, the index of living labour productivity
(net output per industrial employee) was 66%. Among the 19 counties of Hun-
gary Baranya was fifteenth in the first index, in the latter one it became last.
Only the level of industrialisation (rate of industrial employees in the po-
pulation) exceeded the national average. A misconception regarding the condi-
tion of regional development is revealed very clearly in the case of the county,
that is the industrialisation (as a quantity index) and the state of industrial deve-
lopment (as an index representing quality indices as well) run into one another.
Industrialisation was generally used as a development indicator, and in using
this structural problems for example were not even revealed.
A claim for reshaping the development track has also been outlined from
the structure of industrial net production in each industrial sector. 29% of in-
dustrial output came from mining and electric energy industry, 14% from raw
material industry (chemical and building material industry), also 14% from ma-
chine industry, 43% from food processing, light and other industries. The cause
for the industrialisation index to be the only one above the national average is
the mining orientation of the county. At the same time there was a word of
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
warning, namely that the rate of net output in the machine industry was just half
the national average, and that the production of food processing and the light
industry exceeded the rate of the sectors in the national economy by two third.
We get a similarly gloomy picture of the industrial structure with regard
to the number of employees  (Table 1).
Table 1
The structure of industry in Baranya county by the
number of employees in 1980 and 1990
1 9 8 0
1 9 9 0
Change
Industries
Number of
0/
Number of
0/
1990/1980
employees
°
employees
°
Mining
21,313
29.7
13,422
25.9
63.0
Electric energy industry
2,418
3.4
2,432
4.7
100.6
Metallurgy
729
1.0
546
1.1
74.9
Machine industry
8,968
12.5
6,518
12.6
72.7
Building material industry
5,463
7.6
3,979
7.7
72.8
Chemical industry
1,437
2.0
1,625
3.1
113.1
Light industry
17,953
25.0
13,606
26.3
75.8
Other industries
3,721
5.2
260
0.5
7.0
Food industry
9,784
13.6
9,399
18.1
96.0
Total
71,786
100.0
51,787
100.0
72.1
Source: Baranya megye statisztikai ivluinyve. 1980. 1990.  (Statistical Yearbook of Bara-
nya County. 1980. 1990). Pecs: Kozponti Statisztikai Hivatal.
There was hardly any visible change in the industrial structure of the
county in the eighties. Beside the falloff in mining and the coming up of food
industry, there was not much of a reorganisation. The industrial structure has es-
sentially been preserved in a condition which was different from the national
one and in a less developed one taking the economic and market conditions into
account  (Table 2).
The difference itself does not represent a problem of course, since the
specialisation of regional economies, adaptation to local circumstances, is a ne-
cessity and provides a resource for regional economic growth. The structural
problem is characterised by the lack of one or two tracks of adaptation when
structures and basic elements survive, despite the fact that the evoking economic
and market conditions have already changed or become disadvantageous.
With regard to our topic it makes no difference actually whether the cause
of it can be found in the centralised economic policy, the simulated market,
distorted prices, that is in the characteristics of macro economy as a whole or in
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
the companies' organisational, management or local, in some respect subjective
elements. The structural problem, as starting position is a given thing.
Table 2
The structure of industry in Baranya county and in Hungary by the
number of employees in 1980 and 1990 (%)
Hungary
Industries
Baranya county
1980
1990
1980
1990
Mining
30.9
25.9
7.1
6.1
Electric energy industry
3.3
4.7
2.2
3.4
Metallurgy
1.1
1.1
6.0
4.9
Machine industry
11.5
12.6
32.0
32.9
Building material industry
7.4
7.7
4.9
4.6
Chemical industry
2.2
3.1
6.9
8.6
Light industry
28.3
26.3
25.3
22.1
Other industries
1.4
0.5
3.4
1.9
Food industry
13.9
18.1
12.2
15.5
Total
100.0
100.0
100.0
100.0
Source: Baranya megye statisztikai ivkiinyve. 1980. 1990.  (Statistical Yearbook of Ba-
ranya County. 1980. 1990.) Pecs: Kozponti Statisztikai Hivatal
The industrial structure of Pecs city, the county centre is not much more
advantageous, however, the trends of structural change characteristic of the
whole county here are more striking  (Table 3).
Table 3
The structure of industry in Pecs city by the number of employees in
1980 and 1990
Percentage in the
Number of
same industries of
Industries
employees
Baranya county total
1980
1990
1980
1990
1980
1990
Mining
13,133
4,260
34.2
16.9
62.6
31.7
Electric energy industry
1,761
1,849
4.6
7.3
78.2
76.0
Metallurgy
283
191
0.8
0.7
37.0
35.0
Machine industry
4,507
3,637
11.7
14.4
57.5
55.8
Building material industry
2,345
1,795
6.1
7.1
46.5
45.1
Chemical industry
883
1,038
2.3
4.1
61.9
63.9
Light industry
9,340
6,456
24.3
25.6
48.7
47.5
Other industries
739
170
1.9
0.7
73.8
65.4
Food industry
5,433
5,849
14.1
23.2
57.6
62.2
Total
38,424
25,245
100.0
100.0
56.6
48.8
Source: Baranya megye statisztikai evkanyve. 1980. 1990.  (Statistical Yearbook of Bara-
nya County. 1980. 1990.) Pecs: KOzponti Statisztikai Hivatal
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
The significance of the town in the county's employment rate has less-
ened. Decrease in mining is considerable but its counterpoint is the leap forward
of the rate of food processing. Compared on a nation-wide scale, the town's in-
dustry, however, presents quite a gloomy picture in 1990 as well.
Structural weaknesses of the industry in Baranya county are reflected in
the development of income producing capacity as well. The profit of the
enterprises in the county rose from 1,850 million Ft in 1986 to 2,619 million Ft
in 1987, then in 1988 it went down to 1,797 million Ft and even in 1989 it was
only 2,117 million Ft calculated at current price. The profit per employee in
industry in 1989 is 36,500 Ft, and it is equivalent to 3.4% rate in proportion to
net returns.
Additional document to the permanent character of the structural problem
and to the fact that it is still not changing is given by an analysis of the 1986 fi-
gures made by Baranya County's Territorial Organisation of the Central Sta-
tistics Office.
According to it 7% of industrial employees in Baranya work for an eco-
nomic organisation with low profit-yielding, 13% for organisations which are in
a bad financial shape, and 23% work for organisations which produce low profit
and are in a bad financial shape. It is true that economic problems are cumu-
latively present in mining and building material industry (the last group), but
these companies employ 23% of the industrial workers. The companies which
are in a bad economic position employ 41% in light industry and 15% in
machine industry.
Finally we must point out that among the factors representing the growth
capability of the industry, the background for research and development are
rather weak in the county, though they are essential in the secure market diversi-
fication to come. 0.96% of active wage-earners in Baranya (1,944 persons)
worked in jobs connected with research and development (the national rate is
1.6%). From the figures of Table 4 a general survey is drawn up which proves
the disadvantageous conditions of research base in the county.
According to R+D inputs Baranya is the twelfth among the 19 counties,
whereas it is last according to inputs per researcher which is only 25.9% of the
national average. The fact that only 4 company research units are registered by
research and development statistics from the 81 R+D centres of the county gives
food for thought, and at the same time reveals a whole range of things to be
done.
Characteristic additional fact is that only 4 of the 700 development pro-
jects supported by the Central Technical Development Fund and 30 million of
the 6 billion Ft financial support were allocated to Baranya in 1991.
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 4
Data for the research-development centres in 1986
Total number
Expenditures
Input by researcher
Counties
of staff
input
order
million Ft
(thousand Ft) order
Budapest capital
50,839
18,792.8
1
741.4
9
Baranya
1,944
223.0
12
184.6
20
Bacs-Kiskun
678
132.8
13
421.5
11
Bekes
756
245.5
10
1,319.8
4
Borsod-Abafij-Zemplen
2,322
720.1
6
725.2
10
Csongrad
3,656
747.0
5
412.3
13
Fejer
2,455
1,250.4
2
1,576.5
2
Gyor-Sopron
1,449
578.8
8
808.4
8
Haj dil-B Mar
3,225
630.9
7
361.5
16
Heves
570
72.7
16
225.8
19
Komarom
624
233.1
11
1,137.1
6
N6grad
241
37.5
19
421.3
12
Pest
4,050
1,225.7
3
899.3
7
Somogy
220
43.8
18
339.5
17
Szabolcs-Szatmar
745
119.9
14
368.9
15
Szolnok
711
260.2
9
1,227.4
5
Tolna
247
87.7
15
1,654.7
1
Vas
162
19.4
20
242.5
18
Veszprem
2,414
1,150.2
4
1,345.3
3
Zala
355
64.6
17
408.9
14
Source: Tudomdnyos kutatas 6s fejlesztes. 1986.  (Research and Development. 1986.) Bu-
dapest: Kozponti Statisztikai Hivatal
It is difficult to show with synthetic indices the economic potential of Ba-
ranya's industry on the whole. The position according to value added may be
the fixed point to hold on when giving a rough characterisation  (Table 5).
Table 5
Distribution of the added value of industry in 1990
Distribution (%)
Added value per employee
Industries
(thousand Ft)
Baranya
Hungary
Baranya
Hungary
county
total
county
total
Mining
27.2
11.9
303
789
Electric energy industry
12.2
11.8
748
1,374
Metallurgy
1.0
6.6
277
533
Machine mdustry
9.2
24.4
211
298
Building material industry
12.3
4.3
461
373
Chemical industry
7.5
16.6
686
778
Light industry
16.6
13.3
182
242
Other industries
0.3
1.0
154
224
Food industry
13.7
10.1
217
259
Total
100.0
100.0
288
401
Source: Baranya megye statisztikai evkonyve. 1990.  (Statistical Yearbook of Baranya
County. 1990.) Pecs: Kozponti Statisztikai Hivatal. (Calculation by author.)
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
The appropriate data for statistics are collated from the companies' ba-
lance sheet reports, from the field observed in it, that is reservations must be
pointed out mainly in relation to a given region. It arises mainly from the fact
that performance is sometimes taken into account in another region or can't be
revealed. All this is caused by the organisational system of the economic units,
and it happens more often in the case of significant extraterritorial dependence.
On the whole statistics underestimate the value added in the county's industry a
little, yet it is illuminating to survey these sets of data.
It turns out from the table that backwardness of the county's industry is
significant even compared to the national average which does not represent a
high standard either.
It must be mentioned that the industrial structure of Baranya can be de-
scribed by the dominance of mining, light and food industries, and exactly in
these fields the county indices are low or significantly lagged. We firmly be-
lieve that — all possible influences of errors taken into account — the data in their
trends give a realistic evaluation of the relative situation of the county's indust-
ry. Experience proves that the companies which had a characteristic and deter-
minant role in the county's industry previously are now almost without ex-
ception in the state of heavy recession, not rarely of disintegration.
Agriculture reveals a more favourable position regarding the county's e-
conomic potential. The previously used index of value added per employee was
379,000 Ft in Baranya in 1990, compared to 311,000 Ft of national average.
The average estate value, which reveals the quality of all the large farms'
agricultural areas in Baranya is virtually identical with the national figure (18.8,
18.9 respectively), but within it cropland has a county average of 16.4, and the
national average is 17.4. There are significant local differences within the coun-
ty average. For example, the productivity of the eastern and the south-eastern
parts is distinctly favourable with large farms working efficiently, but the other
parts are more or less disadvantageous. The greater part of the Pecs—Kom16 re-
gion belongs to the disadvantageous zone. For example the average index of
productivity in the landscape of Hegyhat, a large part of Pecs—Komlo region, is
around 10-12.
Natural resources of this region don't encourage agricultural production
in large farm, form especially in a production structure, which until recently be-
cause of economic and financial conditions was generally favourable (profitable
in sectoral respect) for large farms in Hungary. Despite this fact, or perhaps that
is why the regional plant concentration of the agricultural co-operatives here ex-
ceeds the county average. Though it cannot be proved directly — with data —, the
accompanying over-employment within agricultural plants is likely to be signi-
ficant.
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It is very difficult to render anything probable in its future, however, agri-
culture may play only a partial role in the transformation of Baranya's econo-
mic structure, in its revitalisation through food processing. If we consider its
role restricted to the Pecs—Kom16 region then we should suppose that it worsens
the critical regional situation caused by the industrial structural change and the
reduction of mining; because the change in the agricultural organisation and
ownership system, the selection made by the market, and the ceasing of forced
over-employment all make the region's agricultural supporting base weaker,
free labour force, and in the case of certain towns, villages and small zones the
lack of attached economic base may occur.
Summing up, the economic structure of Baranya is characterised by an in-
dustry which is organically and locally concentrated, obsolete in its sectoral
structure, regressive in its activity and profitability and by an agriculture which
is still developed and yielding above the average, with relatively favourable re-
sources. However, in the case of the agriculture one the possibility of develop-
ment — which promotes regional economic stabilisation is — differentiated in re-
gions and exactly the Pecs—Kom16 zone is one of those where this chance is
considerably less.
High-grade polarisation in its rural and urban structure has always been a
feature of Baranya's regional development: lots of small villages at one end,
and Pecs, which has the function of the regional centre at the other, and between
the two the interim levels which are generally underdeveloped and can fulfil
their functions in the rural-urban network system only partially. This is the
reason why processes in this region have been concentrated even more than ne-
cessary in territorial sense: the theoretically possible regional system and pro-
portions for fulfilling different management-production-supply functions were
replaced by a more concentrated regional system virtually, where the fulfilment
of functions was by turns shifted upwards. The process, of course, was sustain-
ed and not in a small extent by concentration and centralisation of economic and
regional policy. At present we are witnessing a virtual local „Budapest-synd-
rome", with the difference that the centre which is much more developed than
its region also got into a critical situation, because its economic structure has
stiffened and become obsolete. The Pecs-centred feature of the county has been
given, it cannot be ignored, and the fact that its whole region has got into an
„operating dependence" of it cannot be ignored either.
The region which is directly threatened by depression has approximately
250,000 inhabitants, as we suppose it, and this is more than half of the county's
population. In this region — Pecs, Kom16 and about 50 connected villages — 80%
of the county's industrial employees and of gross value of fixed assets, 79% of
net value of the industrial machines and equipment are concentrated here, so as
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to mention only some features. Internal concentration within this core area is of
similar extent: 81% of the population, 92% of the industrial employees, 95% of
the industrial gross value of fixed assets, 96% of net value of the machines and
equipment can be found in Pecs and Kom16 towns.
Apart from this region, the territory of the county, with the exception of
the north-east and eastern parts, is practically covered by underdeveloped rural
areas (reaching into the supposed area of depressed zone at some places). A
further one seventh of the population (approximately 60,000 people) live here.
In order to make the difference clear: only 5% of the industrial employees of
Baranya live in these rural zones and 11-12% of the whole gross value of fixed
assets can be found here.
Underdeveloped rural and depressed areas jointly mean that the regional
economy of the county struggles with severe development problems, and is cha-
racterised by structural crisis. Despite the internal differences and basically dif-
ferent internal relations the whole of the county's economy needs an overall
treatment. Though the development of economically underdeveloped rural areas
and the restructuring of the depressed zone as programs should be placed in the
centre of a county strategy as equal tasks, key position is taken by Pecs and
partially Komlo.
The size, structure, efficiency and dynamics of the economy in the Pecs
and Kom16 region cannot fulfil the role of the engine, which it has played in de-
velopment so far. The majority of reasons causing the economic development
to stop short and decline does not differ from the factors which caused the
emergence of the depressed areas in the developed countries. It also shows great
similarity how general economic policy exerts its effect.
The critical situation of the Pecs—Kom16 industrial zone and its becoming
a depressed area can be explained mainly by sectoral recession. The heavy re-
duction in the dominant coal and uranium mining cannot be counterbalanced by
other structural elements or resources of the region. Moreover, the change of the
economic regulatory system, the operativeness of normative regulators — first of
all the reduction of export subsidies — as well as — and primarily — the dramatic
change of market conditions shake the position of the light industry which is the
other pillar of the economic base. Food processing, the third pillar also joins
them, there are also negative signs are gathering at present.
This economically declining region — if factors bringing about economic
crisis are jointly present already — is less and less capable of the economic re-
structuring or of lessening the local social and political tension. Economic re-
duction influences the psychological state of the local communities increasingly,
a demographic erosion can be brought about, highly qualified people may trans-
migrate (it can be detected from certain signs that the rate of professionals
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among active wage-earners is continuously decreasing), the state of the service
sector may get worse. That is, the conditions for introducing modern economy
are becoming more and more unfavourable.
The present socio-economic state of the Pecs—Komlo region indicates a
deepening depression. The income yielding capacity and development hopeless-
ness of the economy marks the beginning stage of the region's decline. How-
ever, the classical features of the depression cannot yet be found in the sociolo-
gical structure of the society or in the infrastructural sectors. That is the very
reason why there is a chance in mid-term to prevent deepening of the crisis and
high-grade growth of social costs of revitalisation. It can be done by working
out an regional adaptation and development strategy as soon as possible and by
creating a system of means combined with it.
Unemployment more and more serves as some synthetic indicator of re-
gional crises, which are more and more common and wide spread, and as a
counterpoint of it: the spreading of new-type organisations, the intensity of en-
terprises being established can be an index number of positive reaction to the
crisis. These two indicators — not by chance — denote a certain discriminant in
the government policy as well, they give criteria according to which areas
which are in the worst state and are in need of central intervention most, can be
pointed out,
Unemployment is present in Baranya appearing in absolute numbers as
well from 1989. However, the presence of a considerable, yet indoors unem-
ployment was foreshadowed previously by the county's economic structure,
and by the signs of employers' financial position, liquidity, significant narrow-
ing down of the market. The number of open and registered unemployed people
was 960 in the first month of 1990 and it rose to 5,780 by the beginning of
1991. Within it the rate of unskilled and commuting unemployed people was
dominant. Redundancy mainly hit the unskilled workers whom the companies
had to reimburse travel expenses, so it was a money saving action.
At the same time on the demand side the 2,045 vacancies registered in
January 1990 went down to 893 by the first month of 1991. Moreover, demand
and supply sides showed great structural differences, as the above mentioned
supply of mainly unskilled workers did not suit the companies seeking skilled
workers first of all.
Tension accumulated in the production structure and in the employment
structure of the county as well. While the number of employees in the pro-
duction (the 1st and 2nd sectors) decreased and increased in the non-material
services, processes leading to the constraint of structural change intensified.
These processes were embodied in staff cuts in the first stage.
The fact that the industry of the county has been concentrated in the very
region that has become a critical area makes it more difficult to ease the tension,
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and economic and infrastructural conditions for diversification are insufficient
in other zones of the county.
As a consequent upon all these facts the number of employees in the Ba-
ranya county decreased by 17% in 1991, mainly in the industry and building in-
dustry, but other sectors have made considerable staff cuts, too (Table 6).
Table 6
The number of the out-of-employment job-seekers
Districts
January 1991
June 1991 December 1991 October 1992 Rate in October
(persons)
1992 (%)
Pecs
1,737
2,358
5,478
7,757
7.5
Kom16
1,301
2,002
3,602
5,394
21.7
Mohacs
1,167
1,752
3,310
4,709
18.3
Sellye
905
518
1,023
1,706
&Ides
995
2,161
14.1
3,655
Szentl6rinc
369
670
613
1,068
Szigetvar
725
1,816
24.7
2,959
Total
5,780
8,719
18,003
27,248
13.2
Source: Data by the Job Centre of Baranya County
The heavy predominance of supply in the labour force market has also
been and being effected negatively by the demographic growth of the labour
force, until 1994 about 5,000-6,000 young people will seek for their first job.
During the year a rapidly growing unemployment which increases by 1,000-
1,500 persons every month was registered. By the end of 1991 the number of
out-of-employment job-seekers multiplied by 3.5 that is 18,003 persons.
Among them 15,031 received unemployment benefit or allowance. In April of
1992 the number of out-of-employment job-seekers was about 20,000 person
and in October more than 27,000 (23,068 persons received unemployment
allowance): the rate of expansion has not reduced.
The rate of unemployment from 2.7% in January 1991 rose to 13.2% by
the end of October of 1992 (the national average in December of 1992 was
11.2, that of the provinces 12.6%) which average covers considerable territorial
spreading. While it implies 7.5% in Pecs, it implies 14-25% in the towns Kom-
16, Mohacs, Szigetvar and in their districts.
The labour force market was burdened with contradictions, which meant
regional on one hand and structural troubles on the other hand. Great majority
of jobs was offered by employers in Pecs (80-90%), at the same time only 20-
40% of job-seekers were inhabitants of Pecs.
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The change in the unemployment structure is marked by continuous
growth of skilled unemployed people, and simultaneously the number of un-
employed people with higher education has also increased. About 60% of out-
of-employment job-seekers are men, which is more than their share within ac-
tive wage-earners, 75% belong to the 25-55 age group, the rate under the age
of 25 is 22%.
Despite the increasing tension of the labour force market, employment
opportunities are „the most favourable" in Pecs. The relatively favourable posi-
tion may originate in the Pecs-centredness, however there is also a dynamic un-
employment growth in the background. The large companies concentrated in
the town struggle with severe problems, majority of them have lost their mar-
kets, their liquidity is weak. Negotiations with foreign partners are drawn out or
do not realise. Privatisation is slow and difficult.
The unemployment rate is 7.5% in Pecs in October 1992. The number
of unemployed people is continuously growing. More than one third (38%)
of the unemployed are skilled workers and one third are professionals. 68%
of the reported job vacancies are in Pecs.
Depression effects concerning the county are concentrated in the Kom16
region. Employment opportunities for those who have become unemployed
because of staff cuts have narrowed down, the period of time when they wait
for employment has increased. Employment of unskilled women implies a
special problem here.
The unemployment rate of Kom16 is 5.9% in January 1991, number of
unemployed people is 1,301; 21.7% in October 1992, 5,394 men which shows a
4.15 fold growth. Only 13% of the reported job vacancies in the county is in
Kom16 and its district. But this means so few in absolute numbers that we
cannot speak about job supply. Only 5 jobs can be offered to 100 unemployed
people.
To sum it up, we can state that the heavy unemployment which is al-
ready pressing at the moment — and is bearing social tension — is growing on
in Baranya, too. Resulting from the regionally different effects of the proc-
esses which foster the growth of unemployment (industrial bankruptcies, re-
structuring of agriculture, etc.), the prognostic concerning the county in
1993 shows hardly any modification in the structure. The nearly 30% share
of Pecs in the number of unemployed will remain, the 20% share of Komlo
and its district will increase a bit, but supposedly in a way that the unemploy-
ment in the district increases more than in Komlo town.
The reduction of labour force supply, its tolerable extent can be achieved
only by job creation based on well-considered conception. Only in this case
the means of employment can help this process to be implemented and realised.
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The county's Employment Fund is not capable of doing this properly. The
claims for the deconcentrated fund in 1991 and 1992 — especially in job cre-
ating investments, retraining and retirements with waiving of the age-limit —
far exceeded the possibilities.
Significant worsening in the condition of the labour force market can
be revealed in other indices as well. Another index of the social situation is
the income positions of the population. It is a well-known fact that with re-
gard to property and income Baranya — due mainly to the mining industry —
was one of the regions in the country where people were better off reaching
back for several decades. This better position seems to disappear according
to income and tax statistics for 1990. The revealed taxable income per per-
son is 156,000 Ft in Baranya, and the national average is 165,000 Ft in 1990.
With regard to the size of the specific income tax this means the fol-
lowing: compared to the national average of 12,000 Ft of income tax per per-
son, and to the provincial average of 9,600 Ft, Baranya's index is 11,000 Ft.
Average specific tax bases of Pecs and Komlo are better (181,000, 158,000 Ft
respectively) than the county average.
According to the formation of new businesses and the spreading of enter-
prises, Baranya county is around the national average, or a bit above the provin-
cial average. Of course Pecs plays a determinant role in this respect: according
to the data given in the firm bulletin one (0.94) person from about a hundred
founds a new enterprise. The town average in Baranya is 86 persons from
10,000, though Mohacs, the next town, has less than half of it compared to
Pecs. Moreover, if we do not take Mohacs into account, the villages belonging
to the district of Pecs have an average enterprise-frequency index which exceeds
the index of other towns of Baranya. This means that Pecs and its district — fol-
lowing a model of concentrated and hierarchical spreading (diffusion) — pro-
duce the position of Baranya in the spreading of enterprises. The counterpoint
is, unfortunately, Kom16. According to the situation at the end of 1991, Komlo
is the 39th among the 176 Hungarian towns in its population, whereas,
• it is the 70th according to the number of new enterprises,
• within this it is the 81st according to the number of limited liability
companies,
• it is the 122nd according to the frequency of new enterprises (number
of new enterprises per 10,000 inhabitants),
• it is the 140th according to the frequency of limited liability companies,
• it is the 122nd according to its growth rate of new enterprises in 1991.
Almost each of the data proves the very disadvantageous position of
Komlo when compared to both the national and the county state, especially to
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Pecs in the field of economic revival and transformation of organisation. Cha-
racteristically enough, the indices of Sasd and Pecsvarad, two previous, histori-
cally established microcentres of the region, are better. The frequency index of
the new enterprises in these villages together with some other villages of the
district is nearly equal with the index of Komlo town (27 people found a new
enterprise from 10,000 in Kom16, and 24 in its district). The number of new bu-
sinesses more than doubled in each town of the county in 1991, in Komlo this
index was only 78%, so the pace compared to 1990 slowed down.
If we consider the reaction to crisis according to the spreading and fre-
quency of new organisations, then we must state that Pecs and its district are in
an advantageous, the town of Komlo and its district are in quite a disadvan-
tageous position. Because of the economic structure and the development of the
economic base, the whole of the Pecs—Kom16 region suffers from depression
crisis, which would need regional policy intervention. This region is surround-
ed by a large underdeveloped rural zone, which together with the depressed
core implies the very imminent chance of turning into a socially and econo-
mically critical region if it does not get support. It would be much more diffi-
cult and the costs would be much higher if it was handled later.
Development level of Baranya county's economy on the whole is still in
mean position in the order of the counties of Hungary (Table 7). The former
development advantages of this region in Hungary seem to be lost.
6.2 A change in the function of the regional development
In relation to the development of depressed zones the most uncertain point
of regional (county) policy, or rather strategy is in a paradoxical way just the
county level, the role and possibilities, system of instruments of the counties.
This uncertainty emerges not so much in formulating the tasks and the require-
ments of the responsibility, but when in connection with certain groups of
questions the issues of the theoretical degree of freedom of regional decision-
making come up and the extent to which it may be reduced by the available
system of instruments. The other side of the question is the nature of the di-
vision of labour between the national, local (urban) and county levels of the
regional policy and strategy.
In the emergence of the regional crises — that is, of the problem of the e-
conomically underdeveloped areas and the depressed zones — the macroecono-
mic processes and the central decisions played a decisive role to such an extent
that the accumulation of the regional tensions have grown beyond the present
framework of the regional administration by far by today.
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Table 7
Some characteristic features of the counties in Hungary
Proportion Income to
Un-
Density of
of enter-
personal employ-
Counties
new
prises with taxation per ment rate Complex
businessesa
foreign 1 inhabitant
(%)
indexb
1991
capital (%) (1000 Ft) J uly 1992
1991
1991
Budapest capital
120.04
26.84
125.13
4.9
3.14572
Gyor-Moson-Sopron
59.33
24.19
81.30
7.4
0.98477
Vas
37.29
24.27
81.73
7.8
0.64739
Komarom-Esztergom
67.57
16.43
89.16
12.6
0.48983
Pest
56.78
16.79
81.68
8.6
0.47537
Zala
59.14
14.64
79.23
8.1
0.37797
Veszprem
49.04
18.06
84.88
10.3
0.37768
Fe.*
57.20
12.50
91.18
11.2
0.27317
Somogy
53.61
14.66
71.34
8.7
0.08403
Csongad
41.06
16.63
79.36
10.3
0.06444
Baranya
52.67
16.35
77.01
11.8
0.06105
Bacs-Kiskun
52.63
17.08
67.22
14.1
-0.27807
Tolna
39.97
13.37
77.81
12.5
-0.31623
Haj chi-B ihar
41.68
10.80
71.39
11.5
-0.49599
Heves
38.31c
11.62
70.01
13.6
-0.68288
Jasz-Nagykun-Szolnok
37.00
10.12
73.97
15.1
-0.80256
Negrad
50.06
10.38
71.88
17.7
-0.82933
Bekes
33.80
10.68
68.91
13.7
-0.82948
Borsod-Abauj-Zemplen
43.47
8.26
72.34
18.2
-1.06438
Szabolcs-Szatmar
31.68
7.60
57.73
19.5
-1.68312
Hungary average
61.20
19.70
84.90
10.1
0.00000
Source: NEMES NAGY J. (1992): Hosszti tavu orszdgos is regioncilis novekedisi pdlyak.
(Macroeconomic and regional growth paths for a long term). Budapest: PM GB.
a Number of new businesses (associations) per 10,000 inhabitants
b Estimated factor scores of a factor analysis with the 4 indices (78.2% of variation explained
by this principal component)
c Estimated value
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The consequence of the absurdity and confusion of the existing situ-
ation is that in the solution of these territorial problems it is precisely the lo-
cal and county levels which have the narrowest autonomy of movement and
decision-making within the present institutional and regulating framework.
Today it is simply impossible to develop specific areas and remove them
from the deadlock without the decisions taken at the central government level.
It is obvious that the phenomenon well-known from the past (namely the de-
pendence of local action on central decisions) may recall echoes of past so-
lutions in a lot of people, strengthening further the myth of the omnipotence of
central intervention and injections. At the same time it can be seen that today
the central administration, the „state" may undertake only to moderate the re-
gional crises which are mainly of social character, it can manage crises only on
the short term.
The tasks of developing and restructuring the depression zones will be
faced decisively by the local and county level administration (the local govern-
ments) on the long term. The central state subsidies may be directed at achiev-
ing the socio-political moderation of the short-term tensions and indirectly
at creating the framework and system of instruments in which the scope of
movement of the local and county levels required for solving the tasks comes
into being. Central government investments will not get a role in the structural
changes of the depressed zones because there will be hardly any. But the local
and county administration has to dispose of the incentive, supporting and regu-
lative (in a word influencing) possibilities of the economic sphere, that is com-
petence based on actual economic bases — according to the division of labour
formed in the process of development — by means of which the restructuring of
a region becomes possible on the regional level. There is no time and sufficient
resources to leave everything to the economic automatisms nowadays, on the
one hand, because these automatisms first should become comprehensive and
consistent, on the other hand, because the existing critical situation would lead
to losses aggravated by the regional differences, which would be inequitable
and unfair with respect to the citizens of the adversely affected zones as well.
The transformation of the institutional framework, the system of tasks
and instruments of the local and county administration is most likely underway
owing to the reforms ripening these days, although in a form which can be pre-
dicted with difficulty for the time being.
From the aspect of active local (self-government) influencing the local-
regional economy the basic elements of a regional „self-government-friendly"
future concept might be outlined by way of a model as follows:
• property of communities (local governments), interestedness in the
management of resources and property at the same time,
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• real managing-enterprising possibility and ability for the local govern-
ment („economic local government"),
• independent regional economic regulation which is in accordance with
the responsibility of the local-regional policy (e.g., within limits possi-
bilities to reduce or increase all kinds of taxes which bring in revenues,
• a regional system of banks and financial institutions (which greatly
differs from the current system of commercial banks) including the
varied system of funds and foundations, associations, partnerships, etc.,
• regional business and information infrastructure with the complete
abolishing of state monopoly.
Economic development, the appearance of new structural units would be
greatly promoted by business infrastructure providing services (at the start on a
non-profit but later inevitably on a business venture basis). This palette might be
further coloured by various social-civil organisations, development societies, fo-
undations and funds (private or communal, domestic as well as foreign), asso-
ciations, confederations, etc., that is everything which has proved useful else-
where in the world in the recovery of regions having faced a similar situation.
Furthermore, the international relationships or informal links of the county and
its settlements might also become a useful means, whether by resorting to ex-
change of experience or cooperation in specific fields.
A separate issue is represented by the regional system of banks and fi-
nancial institutions. The currently existing commercial bank branches are not
able to finance the local-regional business ventures because they are not inte-
rested in doing so and this is a grave obstacle. The establishment of a regional
development-investment bank in the field of financing regional business ven-
tures seems to be expedient in the long run. The demand for business venture
funds having been created within the framework of the regional administration
shows that there is a significant gap in the field of financing. Another argument
for the establishment of an independent development-investment bank is the
fact that the system of the necessary preferences and subsidies would function
within a clear, inspectable but normal banking framework, with guarantees of
return which are not provided by the institutional framework of administration
and management despite the best of intentions.
The different formations of subsidies and subventions should not be
concentrated by all means, but rather they should be transformed into trans-
actions resting on uniform economic-financial bases in their functioning, the
requirements and guarantees of utilisation, or be diverted in this direction. In all
probability calling for tenders, awarding and rational utilisation would work
more efficiently in such a system. In an optimal case a regional bank should be
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comprised of a great number of independent joint ventures and major respon-
sible organisations or institutions directly interested in the territorial-regional
development becoming be participants as part-owners depending on their fi-
nancial possibilities.
Restructuring, business and entrepreneurial actions having become ne-
cessary in the depression zones can be implemented by providing peculiar re-
gional subsidies and preferences as mentioned above. This is a sphere which
can take shape within the existing system only and exclusively through central
state decisions, albeit the available information and interestedness at the re-
gional-local level are greater. Most of these decisions are related to regulation
and are, therefore, elements suitable for becoming objects of decentralisation in
the field of the formerly mentioned regional competence and regulation.
Concerning the instruments, functions of the restructuring and develop-
ment of the depression zones, so far we have spoken mostly about the possible
forms without taking into account the addressees, although the division of la-
bour between the concerned levels of administration is of great importance.
The typically disproportionate role of the central (state) level obviously has to
be reduced today. At the same time it should be considered, under what condi-
tions of labour division between the regional and local (settlement) levels
should decentralisation and the development of the depression zones take place
in the course of restructuring and crisis management.
Two factors have to be mentioned here because of their possible impor-
tance:
• in the foreseeable future rapid progress towards a regional and local go-
vernment is highly probable owing to the trend of the self-governing
character of the local-regional administration: interestedness, informa-
tion, decision-making ability and competence are shifted to the level of
settlements, being concentrated there with the necessary instruments;
• in the developing-restructuring process of the depression zone, the core
region of Baranya county — as we have repeatedly referred to it — Pecs
and Komlo, but Pecs in particular, will play a key role.
Unlike in the case of the economically backward areas, where weaker
structuring, the atomisation of the natural, artificial and development endow-
ments do not allow for radical decentralisation and the role of the county (re-
gional) administration will continue to be of primary importance, in the ma-
nagement of the depression zones the majority of the development tasks and
means should be gradually taken over by the local governments of the settle-
ments concerned. The point at issue is not the withdrawal of the regional level
because it would be impossible on account of the impacts and relationships of
the regions, but it is the reduction of its role in the form of such an efficient co-
109

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
operation between the towns and the county where the development prog-
rammes affecting the towns — and presumably the majority of the programmes
will be like that — will become the task, responsibility and possibility of the lo-
cal (town) governments. The existing and new competencies, decision-making
licences, material-financial means which have been or will be decentralised
should be assigned accordingly. We are convinced that concerning the possible
ways of the development of the depression zones as well as the methods and
tasks of restructuring, a division of labour in this manner might release further
energies for organisation, development and management. It would harmonise
better with the nature of the expectable processes, creating more direct relations
of interestedness, in brief, it would create a complex, more favourable situation
and mainly a fair chance to recover from the crises.
6.3 Restructuring: encouragement and initiation of new businesses
and local development
The entrepreneur and entrepreneurship are treated in a very simplistic way in
the intewietation of today's conceptions according to which business ventures
are motivated by advantages and possibilities which can be expressed exclusi-
vely in terms of money. Reality, however, is much more varied than that. The
complex phenomenon of business ventures has also sociological, psychological
and cultural linkage points.
Why does not the entrepreneur type turn up in a particular context? The
explanatory force of limited capital supply and access to information is signifi-
cant. Outstanding importance may be owed to information on account of the
fact that joining the information stream of the world or a country has become a
decisive factor of development. The pressure of accelerated decision-making
may condemn to backwardness regions which are unable to get reliable infor-
mation quickly enough. We can say that the costs of obtaining information are
infinitely much higher in the regions driven to the periphery or being in a state
of crisis than those in the centres. Therefore, it is impossible to interpret their
competitive situation as a rule. The task facing the local governments is ob-
vious. They should function as local development organisations in the capacity
of a peculiar catalyzer enabling the population to become familiar with the eco-
nomic and social processes of the world, that is, they should create the essential
conditions by spreading innovation, since the building out of information sys-
tems is hardly conceivable on an individual basis. Inasmuch as it is conceivable,
then the use of the obtained information will be individual as well. This, how-
ever, cannot bring about a solution either on the local or regional level.
The other limit is represented by the supply with capital. At this point,
however, we have to give a more differentiated wording. We do not have the
110

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
human capital but rather other factors in mind. It is undeniable that in launching
or continuing businesses the majority of the capital injections are utilised with
low efficiency. This applies to nearly all the countries. The fault generally lies
with the exaggerated extent of the physical capital investments of the small bu-
sinesses. That is to say, in the beginning the majority of the small businessmen
come up with a relatively low demand for capital, mainly in the form of work-
ing capital. Money or buildings are not a great help to them by all means. In ad-
dition to the working capital, however, assistance in the administration of the
business and consultation would also be required. Similar is the case with ob-
taining the necessary management practice and marketing knowledge. Appa-
rently, besides the small venture capital the local power or the local government
is able to carry on an effective development policy if providing of the indirectly
indispensable business background (infrastructure) is recognised and ensured.
In our days the encouragement of businesses cannot be confined to the tra-
ditional form of capital aid any more. A local government aiming at achieving
success regards as its task also the creation of institutions which are related to
the business infrastructure in the widest sense. This does not imply merely some
kind of physical background but also human and informational conditions.
Since local development regards chiefly the population as the final re-
source of economic development and growth, this policy should rely on internal
persons, groups and activities. This also results in the shifting of the main points
of this policy as compared to the traditional regional policy. While the latter is
mainly directed at large organisations and physical capital, the former should
target the businessmen of small organisations and the human factor. It is inevi-
table that the system of means of the policy should be changed.
The solution of this issue is not so simple as it might appear at first sight
because the changes are directed emphatically at the spheres of social existence
outside the economy. That is, they affect an area in the influencing of which our
experience is insufficient. It is not enough to ensure the conditions of develop-
ment (access to information, promoting the qualifications of people) if the mo-
tivation required for the launching of businesses does not appear in the popu-
lation. On the other hand, motivation may emerge as a result of the transfor-
mation of the skills, values and way of thinking.
A perceptible contradiction emerges if we examine this from the side
of the state. The state grants may rarely aim at changing the behaviour of the
population, at creating entrepreneurial spirit. This is so because it might have an
impact only on the long term and through the formation of complicated rela-
tions. Consequently, the regional aid programmes which take into consideration
quickly tangible results, may assign only the role of transmission, „distribution"
to the organisations of local development. The short-term interestedness may
111

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
bring about only short-term resolutions to the problems. The errors of the con-
ception supporting the up-bottom approach may be eliminated by the local de-
velopment activity feeding on local roots.
We must not conceal, however, that the advantages of the conception
based upon local development are its disadvantages at once. The long term
means uncertainty, it can be measured less satisfactorily by the traditional eco-
nomic indicators than the short term.
The objectives, instruments and evaluation possibilities of the local
development policy are summarised in a comprehensive table  (Table 8).
Table 8
Tasks and spheres of activities of local development policy
1 Foundation
2 Information
3 Stimulation
TARGET GROUP
Population
(Direct beneficiary)
Small business
Social groups
in the wide sense
Inability of region
Lack of information,
MAIN OBSTACLE
Scarcity of capital
to organise itself,
difficult access
generating entrepreneurs
1 Financing
1  Information,
1 Organising and organ-
2 Information, train-
training
PRIORITIES
isation
ing
2 Organising and
2 Information
3 Organising and
organisation
and training
organisation
3 Financing
Professional training,
Quasi-banks
MEANS OF IM-
grants,
Local development
PLEMENTATION
Loans
modem technologies
Aids
organisations
in information transfer
EVALUATION
Internal criterion of Heterogeneous criteria
CRITERION
Planned profitability
the supply with
for generating long-term
services
growth potential
The three columns of Table 8 set increasingly complex aims for local de-
velopment that are far away from immediate profitability. The relations in co-
lumn  1  are definitely close to the logic of the systems generally functioning at
present. Column 2 already represents components of a new approach. It does
not set the granting of financial aids as an objective, but aims at establishing  a
contact with the whole population by means of which entrepreneurial motiva-
tion may be created in the most suitable persons. In nearly all the countries this
group is characterised as a rule by the fact that it has suitable organisations, but
only at the national level, while the regional or local dimension rarely appears in
their functioning. Column 3 sets the most abstract and ambitious goals. At the
same time its system of means and feedback mechanism cannot be considered
to be elaborated in the least.
112

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
7 THE DEVELOPMENT OF ORGANISATIONAL
STRUCTURE IN BARANYA COUNTY
The administration system with its permissive or prohibitive attitude is in the
closest relation with the organisational structure of the economy. Till the 1980s
the number of business organisations was standard both at the national level and
in the county of Baranya. In fact during the previous periods centralising pro-
cesses characterised the economy.
Small signs of divisions of organisations and their strive for independence
can have been observed since the first half of the 1980s, they mainly manifested
in the termination of large companies, the independence of their units and subsi-
diary companies. Parallel with the changes based on decisions of the higher
level, the entrepreneurs started to think about smaller number of employees,
manageable and more flexible new business forms. The small companies, the
small co-operatives, and the working partnerships under the liability of a com-
pany, etc. appeared. They were the forerunners of the joint small organisations
and small enterprises of today. Some of them are still operating in an unchang-
ed form or as a new type of organisation after transformation.
The process was given a stimulus by passing the Act on Business Associ-
ations and the Act on Transformation of Business Organisations and Associa-
tions in the second half of the 1980s when everybody both natural person or
legal entity could start to form an organisation under the same conditions with
no respect to ownership. The existence of these Acts and the simultaneously
accelerating social and economic changes, the stagnation of the COMECOM
trade that badly affected the organisations operating in the county, the gradual
liberalisation of the export and import gave the manifold organisational changes
a push. By the end of the 1980s several traditional large companies transformed
as a whole or some of their divisions or units formed independent business asso-
ciations, most often medium-sized enterprises. At the same time the founda-
tions of personal ventures based on private initiatives, that required not too high
capital investment, accelerated.
It is not possible to follow the number of business organisations and ven-
tures and to give unambiguous accurate data on them because of the dispersion
of the information. The documentations on foundations, transformations and
terminations, and the recordings of the changes at the different central organs
are made with some delay in time and discrepancy. As a result the data publish-
ed at different places and in different times vary often.
The size of the business organisations with legal personality is given by
the Central Statistical Office (Kozponti Statisztikai Hivatal, KSH) with respect
113

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
to the number of employees. Regarding economic importance the organisations
with 50 or less employees can be considered small organisations. (It needs to be
mentioned that the opinion of the Tax and Financial Control Office is different
on that since the reporting obligation (thus the size of the firm, too) is dependent
on the figure of the realised or the expected return from sales.) We do not have
accurate information on business organisations not having legal personality,
but according to their current role and their small number almost all of them can
be considered small organisations.
The objective of this study is to outline with respect to the number of or-
ganisations the current economic structure of the county of Baranya, the space
of the change and its important directions, the major areas of interest of the
entrepreneurs between the end of 1988 (as the status just before the Act on Bu-
siness Associations came into force) and October of 1992. Since the used data
are from the local data base (data available at the Department of KSH in Bara-
nya county) and the changes and the retroactive effective trends are often re-
corded in the register with a difference in time at the beginning of the year, thus
our data can be different from the ones published on the county of Baranya
according to the national recordings. This, however, does not have a significant
effect either on the direction of changes or their extent.
7.1 Business organisations with legal personality
At the end of October 1992 the number of organisations having legal person-
ality was 2319 in Baranya county. Their number had increased by 677 during
the first ten months of that year and with respect to 1988 (considered as the first
year of the analysis) by more than two thousand, basically since 1990. The or-
ganisations were most often formed in the trade industry and industry, the
construction industry and in other material activities; in personal and economic
service sector. The importance of the major motives affected the economy as a
whole varied according to sectors.
During this time the traditional large companies of the industry and the
construction industry faced such crises as a result of the effect of internal and
external market conditions that it could be foreseen that some of those compa-
nies were bound to be wound up. Previously or as a result of the winding up
procedure those units that were considered to be capable of living became inde-
pendent. At the same time the conditions of venture had favourable changed.
The venture stimulating factors appeared in the economic policy, thus the ideas
could be more freely realised in every field. The rapid growth in the number of
unemployed forced people to start venture to ensure their existence.
After coming into force the Act on Pre-privatisation incited and stimu-
lated the trade industry.
114

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Benefiting from the favourable conditions ensured by the tax system
played an important role in stimulating the formations of business associations
in the personal and economic service sector.
As a result of the changes in the number of organisations the organisation-
al structure of the economy altered in the county, too. Despite the significant
increase between the end of 1988 and October 1992 the share of industry de-
creased from 31 percent to 21 percent. The participation of the trade industry,
however, increased with 20 percentage points, and within the sector the number
of business units operating in foreign trade grew practically from zero to close
to a hundred. Despite the crises of the construction industry with respect to the
number of organisations the sector's weight has grown. It suggests that the units
forced to separate from the companies under winding up procedure were able to
recover, and a group of entrepreneurs believes that the small and flexible units
are viable even in this critical sector.
Decisive majority of business organisations is business associations ope-
rating in the form of limited liability company  (korlatolt felelassega tcirsasag,
hereinafter: Kft). Most of the time the new business associations begin their ac-
tivity in the above mentioned form because of the small initial capital that can
be provided even by one or more individuals. As a result of the transformations
the number of companies decreased in the county between 1988 and 1992.
They continue their activity in the form of a company limited by shares  (resz-
venytarsasag, hereinafter: Rt) or in some case of limited liability company. The
decrease in number affected mainly the manufacturing, the commerce and to  a
lesser extent the construction industry, these sectors are characterised by the
foundations of Rts. At the same time the Kft became popular in every sector of
the economy maybe to a lesser extent in the postal service and telecommunica-
tion sector, where the solid monopolistic position is still prevalent and narrows
down the scope of ventures.
The increase in the number of organisations speeded up in 1991. Two-
third of the growth in number between the end of 1988 and October 1992 hap-
pened after January 1991. The increase in number in the large sectors was with
respect to manufacturing 66 percent, construction 74 percent, agriculture and
forestry additionally commerce 72-72 percent. The later happened in less then
two years.
Despite the fact that beginning from the 1970s foreign capital investment
was allowed in Hungary, the foreign investors become really interested only in
the last two years. In 1991, in the aggregate, 153 business associations were
formed (only Kfts) with foreign participation in Baranya county. Because of the
importance of the everyday relations half of the organisations belonged to com-
merce and a quarter of it was formed in manufacturing.
115

-
Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
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116

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 2
Number of business organisations according to sectors and business
forms, October 31, 1992
a) In number
Of which
Sectors
Total
Of which
Enter-
Business
Co-ope-
prises associations
Kft
Rt
ratives
Industry
489
37
425
408
16
27
Construction
333
4
314
307
4
14
Agriculture and forestry
165
7
84
80
4
74
Transport, postal and tele-
communication services
59
3
54
54
1
Commerce
767
7
741
720
19
19
Water supply
61
3
4
2
54
Personal and economic
services
324
18
231
226
2
72
Health, social, cultural
services
89
2
77
76
2
Communal, administration
and other services
32
16
14
Total
2,319
81
1,946
1,887
45
263
b) Growth and decrease in relation to December 31, 1988
Industry
411
-6
414
401
14
3
Construction
312
-3
313
307
4
1
Agriculture and forestry
96
1
83
80
4
12
Transport, postal and tele-
communication services
55
1
54
54
-1
Commerce
733
-8
738
718
18
3
Water supply
53
3
2
50
Personal and economic
services
290
4
227
224
1
56
Health, social, cultural
services
84
76
76
Communal, administration
and other services
31
15
13
Total
2,065
-11
1,923
1,975
41
124
117

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Most of the later mentioned 18 business associations pursue activities in
machinery industry. Eleven joint ventures were formed in the light industry,
primarily in the timber industry, and in the textile and clothing industry because
of the frequent opportunity for commission work. The new organisations were
characterised that they started to operate with the mandatory minimum one
million forints worth initial capital as it was stipulated. The majority of the Kfts
with foreign interest did the same. Currently they play a minimal role in the
economy of the county. It needs to be mentioned that we do not have informa-
tion on foreign investments through raising capital in operating organisations
or acquiring quotas.
Three quarters of the business organisations with legal personality had
maximum 20 employees in October 1992, and at an additional 8 percent the
number of employees did not exceed the 50. Since the decisive majority of
newly formed organisations belongs to the group employing few people,
their proportion is significantly increasing from year to year. (At the end of
1991 the figure for organisations with less than 50 employees was 77 percent,
while at the end of 1988 it was only 20 percent) In the sectors where the estab-
lishment of organisations has been the most vivid for a long time (manufactur-
ing, construction, commerce) the number of ventures with small number of
employees is above average. (For example 89 percent of the organisations
in commerce employs less than 20 persons.)
The organisational sizes significantly vary at the different business forms
in relation to the frequency of new foundations of enterprises. While at the end
of October 1992 11 percent of the companies, 41 percent of the co-operatives,
one quarter of the Rts employed less than 50 persons, then the 95 percent of the
Kfts belonged to ventures small in number.
At October 31, 1992, 21 percent of the business organisations, 489 orga-
nisations pursued primarily industrial activity (Table 3). The number of the ope-
rating organisations is most significant in machinery industry, it follows the
light industry and then the food industry. The growth was the highest in these
three sectors during the last years. While the number of the firms belonging to
mining industry has hardly changed anything, regarding the electric energy in-
dustry it has not changed.
Considering their number there were only few business organisations
operating in mining and in electric energy industry. Although their economic
weight is very significant because of their size with respect to both the number
of employees and production.
The general trends of the sectors prevailed in the industrial organisations
with legal personality during the last years. The decrease in the number of com-
panies caused primarily by the transformations began in January 1992. It has
affected every sector except for mining, metallurgy, chemical and other in-
dustry. The nuthber of Kfts pursuing industrial activity has grown by at about
138 (51 percent) since 1989. The figure is 6 with respect to Rts (Table 4).
118

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 3
Distribution of business organisations pursuing industrial activities
Organisation
Sectors
Number
1988
1992
1988
1992
Mining
2
4
2.6
0.8
Electric energy
2
2
2.6
0.4
Metallurgy
2
11
2.6
2.2
Machinery
25
198
32.0
40.6
Of which:
Manufacturing equipments, machinery
9
88
11.5
18.0
Transportation vehicles
5
33
6.4
6,7
Precision engineering
2
21
2.6
4,3
Building material
5
35
6.4
7.2
Chemical
4
28
5.1
5.7
Light industry
26
141
33.3
28.8
Of which:
Wood-processing
9
51
11.5
10.4
Leather, fur, shoes
8
28
10.3
5.7
Textile and clothing
3
30
3.8
6.1
Other industries
1
11
1.3
2.2
Food industry
11
59
14.1
12.1
Total
78
489
100.0
100.0
Table 4
Number of industrial business organisations according to business
forms, October 31, 1992
Of which
Sectors
Total
Enter-
Business
Of which
Co-opera-
prises
associations
Kft
Rt
tives
Mining
4
2
2
2
-
Electric energy
2
2
-
2
Metallurgy
11
1
9
8
1
1
Machinery
198
14
175
173
2
9
Of which:
Manufacturing equipments
and machinery
88
7
76
75
1
5
Transport. vehicles
33
2
30
29
1
1
Precision engineering
21
-
19
19
-
2
Building material
35
2
32
30
2
1
Chemical
28
1
24
24
-
3
Light industry
141
9
120
114
5
12
Of which:
Wood processing
51
2
46
44
2
3
Leather, fur, shoes
28
4
20
17
2
4
Textile and clothes
30
-
28
27
1
2
Other industries
11
1
10
8
2
-
Food industry
59
7
51
49
2
1
Total
489
37
425
408
16
27
119

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
The size composition of the organisations has significantly changed in the
industry since 1988. While at the end of 1988 less than 22 percent of the num-
ber of business organisations with legal personality belonged to enterprises
small in number, in October 1992 almost four-fifth of them (389 enterprises)
are small enterprises. The 95 percent of them was business associations (all of
them but one was Kft), additionally there were 7 companies and 11 co-opera-
tives.
Business organisation having legal personality with less than 50 em-
ployees was not founded in mining and in electric energy industry (Table 5). In
all other sectors their participation was 50-100 percent, respectively. Most often
the Kfts were the small enterprises, the figure for this form of business asso-
ciation with less than 50 employees was 92 percent. The larger sizes inherited
from the past are prevalent considering companies and co-operatives. The
operating divisions separated from companies increase the number of medium-
sized (51-300 employees) enterprises. Since a relatively high initial capital is
required for the formation of a Rt and it has a more complex organisational
form the Rts belong to the larger sized enterprises.
Table 5
The number and proportion of business organisations having legal
personality with less than 50 employees by sectors, October 31, 1992
Per cent
Sectors
Number in total in enterprises in associations in co-operatives
Metallurgy
7
63.6
77.8
Machinery
173
87.4
50.0
91.4
66.7
Of which:
Manufacturing equip-
ments and machinery
71
80.7
14.3
88.2
60.0
Transport. vehicles
27
81.8
50.0
86.7
Precision engineering
19
90.5
89.7
Building materials
27
77.1
84.4
Chemical
25
89.3
100.0
33.3
Light industry
102
72.3
82.5
25.0
Of which:
Wood processing
40
78.4
844
33.3
Leather, fur, shoes
14
50.0
70.0
-
Textile and clothes
22
73.3
75.0
50.0
Other industries
9
81.8
90.0
Food industry
46
78.0
88.2
100.0
Total
389
79.6
18.9
87.3
40.7
120

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Measuring the output of small enterprises is made by using representative
methods nation-wide, thus it does not give us useful information on the coun-
ties. To show their weight it needs to be mentioned that despite their large num-
ber their participation in the gross industrial national production value was at
about 6 percent. Thus despite their dynamically growth (about 20 percent in-
crease in production) they could mitigate the production set back in the larger
companies caused by the worsening market conditions to some extent.
7.2 Business organisations not having legal personality )
Similarly to the national trend the formation of numerous organisations belong-
ing to that group can be witnessed during the last years, though the information
on the aggregate number is only available in Baranya county from the end of
1991. The reason for their popularity is that there are no provisions on a com-
pulsory minimum initial capital for these business forms. By now the different
legal forms bear different significance. In the middle of the 1980s quite a large
number of work partnerships in enterprises (formed pursuant to Decree 28/1981.
(IX. 9.) MT,  v011alati munkakiizdssegek,  Vgmk) and other private work partner-
ships  (magan gazdasagi munkakitassegek,  Gmk) operated in the county. They
are disappearing, however, since according to the new Act on Business Asso-
ciations it is not allowed to form new venture in those forms any longer. Fol-
lowing the acceptance of the new Law the limited partnerships have become
the most popular of the possible forms.
By the end of October 1992 the figure for business organisations without
legal personality was 2,346  (Table 6).  A significant increase has taken place
during the last ten months of the year 1992. Particularly the number of limited
partnerships showed a major increase, its number has doubled during that year.
It might be in relation with the fact that beyond the new establishments the
work partnerships (that were founded according to former laws) and individual
entrepreneurs, that built up marketable businesses, pursue on their business acti-
vities in this form after the abolition of the previous business forms.
An extremely large divergence can be witnessed with respect to the
sectors the organisations operating in different forms belong to. A decisive
number of work partnerships (Gmk) pursues manufacturing and construc-
tion activities. Almost half of the limited partnerships operated in commerce
both at the end of 1991 and at the end of October 1992.
The number of operating organisations without legal personality is the
most significant in two sectors, in the machinery and light industry. The fi-
gure was more than one quarter for the organisations in light industry and 47
percent for the organisations in machinery industry  (Table 7).
121

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 6
The number of business organisations without legal personality by sec-
tors and business forms, October 31, 1992
Business
Of which
Sectors
organisations  work partner-
deposit
individual
ships
organisations  entrepreneurs
Industry
479
247
216
79
Construction
335
187
143
25
Agriculture and forestry
77
8
30
9
Transport
88
18
66
4
Communication
12
9
3
Commerce
844
76
730
103
Wholesale and retail
798
76
687
103
Foreign trade
46
-
43
Water supply
2
2
Personal and economic
services
401
116
279
27
Health, social and cultural
services
86
5
81
4
Communal, administration
and other services
22
8
13
Total
2,346
676
1,561
251
Table 7
The number of business organisations not having legal personality by
industrial sectors and business forms, October 31, 1992
Business
Of which
Sectors
organisations  work partner-
deposit
individual
ships
organisations  entrepreneurs
Mining
3
1
2
Electric energy
2
2
-
Metallurgy
1
-
1
1
Machinery
223
133
82
19
Of which:
Manufacturing equipments,
machinery
112
78
28
-
Transport. vehicles
32
14
18
3
Precision engineering
21
14
7
8
Building materials
18
8
9
Chemical
39
22
15
Light industry
125
48
73
3
Of which:
Wood processing
46
19
27
3
Leather, fur, shoes
21
9
11
Textile and clothes
30
14
16
Other industries
28
7
20
53
Food industry
40
26
14
3
Total
479
247
216
79
122

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
The trend regarding business forms significantly differs from the trend
characterising all the sectors. Half of the business organisations without legal
personality were work partnerships (Gmk) and 45 percent was limited partner-
ships in the industry, while with respect to all the sectors two-third of the or-
ganisations operated in the later form.
There are differences between the industrial sectors regarding the pre-
valence of legal forms. The work partnerships (Clink) operating for a long time
now are the prevalent in machinery industry, and beside that there are dynami-
cally developing limited partnerships. At the same time the limited partnerships
caught up or passed the work partnerships (Gmk) in number in the other areas.
Since the first half of the 1980s numerous individual entrepreneurs have
pursued their businesses in the county, though there are no detailed data avail-
able on their activities or their number.
It is a fact though that before the appearance of the different small enter-
prises with or without legal personality a decisive part of the consumer services
for the population and a growing proportion of retail supply were provided by
them.
During the last two years there had been a radical increase in the number
of entrepreneurs too, as a result of the spreading of economic services and can-
vassing. Their total figure was 24,511 in Baranya county in December 31, 1991.
With respect to retail the figure was 21 percent and one-third of them worked in
some kind of an industrial area. Their activity is important in providing direct
and quick services for the population.
7.3 The regional distribution of business organisations
The distribution of business organisations in the county is similarly concentrated
as happens in the country. A significant role is played by the cities, four-fifth of
the organisations with and without legal personality operated there in October
1992. Because of the central role played by the organisations with a county
location two-third of them are located in the county's capital.
The different sectors play different role in each of the regions. The orga-
nisations that belong to agriculture and forestry are located close to the culti-
vable fields in the villages. Thus 65 percent of the organisations with legal per-
sonality and 57 percent of the organisations not having legal personality operat-
ing in these sectors can be found in those settlements. The organisations of the
management of water-supply industry that are located in the villages also play
important role.
Generally the foundations of ventures are more dynamical in the towns,
thus their share in the total figure for the number of organisations is still in-
123

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
creasing. We could mention the organisations belonging to manufacturing and
construction industry as exceptions, where during the last ten months of 1992
the proportion of organisations operating in towns slightly decreased. It may be
in relation with the separation of industrial and construction divisions of co-ope-
ratives, choosing new business form or the willingness to venture and the in-
creasing urgency to start ventures in the smaller settlements.
By the end of October 1992 some kind of a venture was operating in 150
settlements that is in half of the county's settlements. Naturally they more fre-
quently appear in the larger settlements, close to towns, in settlements playing
the central role of a smaller region, or settlements that are affected by tourism
(Table 8).  The organisations operating in commerce are present in the largest
number in the settlements, organisations of agriculture and forestry follow them
in the row.
The highest proportion was represented by the organisations operating in
industry, commerce, and pursuing other material activities; personal and econo-
mic services in all the five towns of the county. Beyond that the weight of con-
struction industry was significant in Pecs and Mohacs, and the number of or-
ganisations operating in agriculture and forestry was about 10 percent in the
later town because of relatively developed agricultural conditions.
At the end of October 1992 as we previously mentioned four-fifth of the
industrial organisations operating in the county had less than 50 employees.
Their number began to increase strongly in 1990. At the end of 1988 the figure
was only 17, it doubled in 1989 and by the end of 1990 it increased to 144, and
by the end of 1991 it reached 253. Practically the number of business associa-
tions, particularly of the Kits grew.
The industrial organisations with less than 50 employees are concen-
trated to towns to a lesser extent than all the organisations of the county and the
industrial organisations as a whole  (Table 9).  The number of industrial organisa-
tions with few employees, that can be found in the five towns of the county, is
close to 76 percent. All 7 companies operating with less than 50 employees, and
9 from the 11 co-operatives can be found in the towns, and three-fourth of the
business associations conduct their activities in one of those towns.
The 94 industrial organisations small in number operating in villages
pursue their activities in 38 settlements. In October 1992 one of each operated
in 20 settlements, two or more ventures were in 18. These later settlements
decisively belonged to the settlements with a population of two thousand or
more.
The number of the industrial organisations without legal personality 3
was 558 at the end of 1992, and four-fifth of them, 444 organisations oper-
ated in the five towns  (Table 10).
124

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 8
The regional distribution of business organisations, October 31, 1992
a) Organisations with legal personality
Sectors
Pecs Kom16 Mohacs Siklas Szigetvar Towns Villages Baranya
Industry
286
27
32
15
16
376
113
489
Construction
270
6
13
2
2
293
40
333
Agriculture and forestry
38
2
11
2
4
57
108
165
Transport and commu-
nication
42
2
4
2
50
9
59
Commerce
577
19
27
14
13
650
117
767
Water supply
9
2
2
1
14
47
61
Personal and economic
services
251
12
16
6
11
296
28
324
Health, social and
cultural services
74
3
1
1
1
80
9
89
Communal, administra-
tion and other services
24
2
1
1
1
29
3
32
Total
1,571
75
107
43
49 1,845
474 2,319
b) Business organisations without legal personality 2
Industry
359
24
33
11
17
444
114
558
Construction
240
13
8
3
9
273
87
360
Agriculture and forestry
25
4
4
2
2
37
49
86
Transport and commu-
nication
67
5
5
3
5
85
19
104
Commerce
650
47
39
20
21
777
170
947
Water supply
1
-
1
1
2
Personal and economic
services
354
3
3
391
37
428
Health, social and
cultural services
75
3
3
81
9
90
Communal, administra-
tion and other services
21
1
22
22
Total
1,792
111
104
45
59 2,111
486 2,597
125

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 9
The number of industrial organisations having legal personality
operating with less than 50 employees by business forms and
regional distribution, October 31, 1992
Of which
Jetuements
i otai
enterprises business associations co-operatives
Pecs
231
2
224
5
Kom16
16
2
13
1
Mohacs
21
1
18
2
Siklos
14
1
13
Szigetvir
13
1
11
1
Towns total
295
7
279
9
Villages total
94
92
2
County total
389
7
371
11
Table 10
The number of industrial organisations without legal personality
by business forms and regional distribution, October 31, 1992
Of which
Jetuements
I otai
Work partnerships Deposit organisations
P6cs
359
150
146
Kom16
24
12
7
Mohacs
33
28
2
Sikl6s
11
5
5
Szigetvir
17
7
8
Towns total
444
202
168
Villages total
114
43
48
County total
558
245
216
In accordance with the opportunities the role of the county's capital is de-
cisive as it is the case in all the sectors. The 64 percent of the industrial organi-
sations without legal personality operating in the county and 81 percent
pursuing business activities in towns conducted business in this settlement.
The 44 percent of these organisations was work partnerships (Gmk) 4 that
have strong linkages to the industrialisation of the towns. A significant part of
them was formed within the industrial organisation as work partnerships in en-
126

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
terprise in the years of the 1980s. A larger proportion, 22 percent of the limited
partnerships worked in villages at the end of October 1992.
We found the 114 industrial organisations without legal personality ope-
rating in villages in 47 settlements. There were 26 villages where there was no
industrial organisation with legal personality, and in half of the later settlements
only one organisation operated even from among the ones without legal per-
sonality.
In summary it can be stated that the organisational structure of Baranya
county regarding both the business forms and the organisational sizes went
through fundamental changes similarly to the national one in the 1980s. The
role of traditionally large companies has gradually decreased, and the small
ventures gained large ground in every sector.
It needs to be mentioned though that the structure with respect to the
number of organisations cannot be compared to the role played by the sector
regarding activity and production, since the size of the organisation has a
basic influence on the position gained in the economy.
The small organisations are founded with different objectives and for dif-
ferent scale than the larger sized organisations. The requirement can only be
that an organisational structure that is capable of complying to the quantita-
tive and qualitative requirements of internal and external market conditions
would evolve in he county with respect to size and sectoral belonging.
Notes
1  All the way through the general analysis it includes the business organisa-
tions without legal personality, but from the individual entrepreneurs it in-
cludes only those who did not keep cash book.
2  The joint business ventures together with the 251 individual entrepreneurs
recorded in the detailed resisters at county level
3  The joint business ventures together with the 79 individual entrepreneurs
recorded in the detailed registers at county level
4  Together with the work partnerships operating under the liability of legal
person
127

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
8 FUNCTIONING OF SMALL AND MEDIUM-SIZED
ENTERPRISES IN BARANYA COUNTY
(REPORT ON A SURVEY)
The fourth year students of the Faculty of Economics at the Janus Pannonius
University in Pecs were commissioned by the University and the Centre for Re-
gional Studies of the Hungarian Academy of Sciences to make an investigation
with the use of a questionnaire within the scope of ACE project Students were
informed on the tasks of an interviewer and were given the name and address of
firms to be interviewed on 29th October 1992. The list of enterprises was given
us by the Statistical Office of Baranya County. It contained 264 units. Among
them there were 127 economic units with the legal entities and 137 economic
units without being legal entity. During the investigation it came to light that
about 50% of the firms included in this list does not exist any more and we got
more addresses from professional corporate organisations.
Thus, 140 questionnaires were filled in during the month of November.
The general experiences reported by the interviewers are as follows:
• the firms that were interviewed were helpful and co-operative, cases of
denial were rare;
• there were some difficulties in the time scheduling of interviews with
managers;
• apart from the items on property volume, profit, rentability managers
gave true information in general;
• interviews was slowed down by the need of indicating a lot of items in
%; the majority could not give a prompt reply to these items and in
many cases the answers were only rough estimations;
• some items and some terms used in items needed a further explanation
(e.g. the term of marketing);
• items related to market were difficult for very small enterprises (with a
staff of 1-2 persons).
The filing of questionnaires was done at the Faculty of Economics at the
Janus Pannonius University in the first half of December.
8.1 Results of the questionnaire's general section
Apart from the number of staff and employees in the previous month, the ma-
jority of items were replied by all the (140) firms interviewed. Among from the
firms interviewed 30.75% (43) is interested in wood and furniture industry,
128

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
36.4% (51) in leather, fur, textile and clothing industry, and 28.6 (40) is inte-
rested in food industry. The activity of 4.3% (6) enterprises have a mixed type
so they belong to a „mixed" category (Table 1).
Table 1
The branch structure of the enterprises analysed
Total Wood in-
Textile and
Food in-
Mixed
Specification
dusty
cloth industry
dustry
profile
The number of enterprises
140
43
51
40
6
Percentage
100.0
30.7
36.4
28.6
4.3
Among from the 140 firms 60% (84) is situated in Pecs, 14.3% (20) in
medium-sized towns, 6.4% (9) in small towns and 19.3% (27) in villages
(Table 2).
Table 2
Location of the enterprises analysed (%)
. Wood
Textile and
Food
Mixed
Specification
Total
Industry
cloth industry
industry
profile
A town of over 100
thousand dwellers
60.0
62.8
68.6
45.0
66.7
A town of 20-99
thousand dwellers
14.3
14.0
15.7
15.0
0.0
A town of under 20
thousand dwellers
6.4
7.0
3.9
10.0
0.0
Village
19.3
16.3
11.8
30.0
33.3
Total
100.0
100.0
100.0
100.0
100.0
A telephone is available at 80.7% (113) of them but 20.3% (27) must
work without the possibility of using telephone. There are only minor diffe-
rences from this average within branches.
22.3% (31) of enterprises interviewed was founded in 1989 or before
22.1% (31) was founded in 1990, 42.9% (60) in 1991 and 18.9% (18) was
founded in 1992.
The majority - 41.9% (13) - of the new firms formed in 1989 (or before)
was working in wood and furniture industry. In 1990 leather, fur, textile and
clothing industry was the most popular with its share of 45.2% (14) from the to-
tal of new enterprises. This sector was still the most active in 1991 with a share
of 43.3% (26), while it was furniture and wood industry with its share of 50%
(9) which was the most attractive in 1992.
129

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
2 firms (1.4) were not able or willing to answer for the item on their ini-
tial assets. The initial assets of 79 enterprises was below 1 million HUF (35.7%)
and they exceeded the sum of 10 million HUF only in case of 9 firms (6.4%).
From initial assets cash rate remained below 10% (12.9%) in 18 enter-
prises; it is between 11 and 30% in 16 enterprises. This is 11.4% of all the firms
interviewed. Cash rate is between 31 and 60% in case of 98 firms (this is 27.1%
of all the enterprises interviewed), it is between 61 and 90% in 8 enterprises
(5.7%) and it is over 90% in 58 enterprises, that is 41.4% of all the firms in-
terviewed.
9 enterprises did not answer for the item on their present volume of assets
(6.4%). 38 firms (27.1%) estimate their present volume of assets for less than
one million HUF, 73 firms (52.1%) estimate their present volume of assets
between one and ten million HUF and 20 enterprises (14.3 percent) declare
their present volume of assets to be more than 10 million HUF.
Among the enterprises interviewed there are 9 (6.4%) private firms, 3
(2.1%) co-operative (private) associations, 98 (70%) businesses based exclu-
sively on private persons, 20 (14.3%) are based on the mixture of private
and legal entities and 10 (7.1 percent) are based exclusively on legal entities.
21 (15%) of the enterprises interviewed uses foreign capital. Among from
the firms with foreign capital involved 42.9% is interested in furniture and
wood industry, 47.6% is interested in leather, fur and clothing industry and only
9.5% in food industry.
In October 1992 there were 51 firms (38.1%) with a staff less than 5 and
24 (18%) with a staff between 6 and 10. There were 28 enterprises (21.1%)
with a staff of 11-20 and 22 (16.5%) with a staff of 21-50. There were only 8
firms with a staff over 50 (62.5% of them is interested in leather, fur and
clothing industry).
According to the study in all types of settlements the most popular form
of ventures is the one founded solely by natural persons, 70% (98 firms) of the
interviewed enterprises belong to them. There is a significant difference regard-
ing small towns where this form is represented only by 44% (4 firms) of the
firms. 14.3% (20 firms) of the interviewed enterprises were founded by both
natural and legal persons, it was the most popular form in towns, 25% (5 firms).
7.1% of the enterprises were founded solely by legal persons, this form cannot
be found in towns, but it is represented in small towns by a figure higher than
the average, 22.2% (2 firms) and in villages by 11.1% (3 firms). 6.4% (9 firms)
is individual enterprise, their proportion is 22.2% (2 firms) in small towns and
8.3% (7 firms) in Pecs. The least favoured form is the co-operative (private) en-
terprise, with its 2.1% in the total sample. 77.8% (7 firms) of the individual en-
terprises are located in cities, 22.2% that is 2 firms are in small towns, and from
130

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
the three co-operative enterprise 2 firms are located in Pecs and 1 of them in a
village. Among the enterprises founded solely by natural persons 61.2% (60
firms) is located in Pecs, 19.3% (19 firms) of them are operating in villages,
15.3% (15 firms) in towns, 4.1 (4 firms) in small towns. Half (10 firms) of the
enterprises founded by both natural and legal persons are in Pecs, 25% in towns,
20% in villages and 5% in small towns. Similarly, half (5 firms) of the enter-
prises founded solely by legal persons is in Pecs, 30% is in villages and 20% is
in small towns.
Regarding the number of telephones the co-operative (private) enterprises
and the enterprises founded solely by legal persons are in the best situation, it is
shown by the relevant 100% index. 95% (19 firms) of the enterprises founded
by both natural and legal persons, and 77.6% (76 firms) of the enterprises
founded solely by natural persons have telephones. In this respect the individual
enterprises are in the worst situation, only 55.6% (5 firms) of them have tele-
phones. According to that 67.3% (76 telephones) of the total telephones operat-
ing at the interviewed enterprises are at the firms founded solely by natural per-
sons, 16.8% (19 telephones) of them are at firms founded by both natural and
legal persons, 8.8% (10 telephones) is at firms founded solely by legal persons,
4.4% (5 telephones) at individual firms, and 2.7% (3 telephones) at co-opera-
tive enterprises.
In all sectors the decisive majority (68.8-83.3%) of the interviewed enter-
prises was operating in the form of enterprise founded solely by natural persons.
Among the firms pursuing business in furniture and wood industry 18.6% (8
firms) of the enterprises was founded by both natural and legal persons, 7% (3
firms) operated as individual firms, 2.3% (1 firm) was founded solely by legal
persons. The enterprises founded by both natural and legal persons were the se-
cond in popularity with their 15.7% (8 firms) in leather, fur, textile and clothing
industry. The enterprises founded solely by legal persons — 17.5% (7 firms) of
the enterprises — were at the second place in food industry. From the 9 inter-
viewed individual firms 55.6% operated in leather, fur, textile and clothing in-
dustry, 33.6% in furniture and wood industry, 11% in food industry. For the co-
operative (private) enterprises included in the study the same proportion of the
enterprises were present in leather, fur, textile and clothing industry, in food in-
dustry and being involved in more than one industry at the same time. The re-
spective data for enterprises founded by solely natural persons are 35.7% (35
firms) in leather, fur, textile and clothing industry, 31.6% (31 firms) in furniture
and wood industry, 27.6% (27 firms) in food industry. 40% (8 firms) of the en-
terprises founded by both natural and legal persons are operating in furniture
and wood industry, the figure is the same for leather, fur, textile and clothing in-
dustry, and it is 20% for food industry. The majority — 70% (7 firms) — of enter-
prises founded by legal persons are pursuing business in food industry, 20% in
131

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
leather, fur, textile and clothing industry, and 10% in furniture and wood in-
dustry (Table 3 and 4).
Table 3
Legal forms of the enterprises interviewed (%)
Legal forms
Wood Textile and
Food
Mixed
Total
. Industry cloth industry *industry
profile
Private firms
6.4
7.0
9.8
2.5
0.0
Co-operative associations
2.1
0.0
2.0
2.5
16.7
Businesses based exclusively
on private persons
70.0
72.1
68.6
67.5
83.3
Businesses based on private
and legal entities
14.3
18.6
15.7
10.0
0.0
Businesses based exclusively
on legal entities
7.1
2.3
3.9
17.5
0.0
Total
100.0
100.0
100.0
100.0
100.0
Table 4
Legal forms and branches of enterprises
Wood
Textile and
Legal forms
Food
Mixed
Total
. Industry cloth industry industry
profile
Private firms
9
3
5
1
0
Co-operative associations
3
0
1
1
1
Businesses based exclusively
on private persons
98
31
35
27
5
Businesses based on private
and legal entities
20
8
8
4
0
Businesses based exclusively
on legal entities
10
1
2
7
0
Total
140
43
51
40
6
From the 140 interviewed enterprises 42.9% was founded in 1991, 22.1%
in 1990 also 22.1% in 1989 or previously. Only 12.9% that is 19 firms started
operation in 1992. From the 9 individual firms 44.4% already operated in 1989,
33.3% in 1990, 11.1% in 1991 and the same 11.1% in 1992. The 3 co-operative
enterprises included in the study were established in 1989, 1990, 1992. 52% (85
firms) of the enterprises founded solely by natural persons have been operating
since 1991, 19.4% since 1990, 16.3% since 1989, and 12.2% since 1992. 35%
(7 firms) of the enterprises founded by both natural and legal persons were es-
tablished in 1991, 30% in 1989, 25% in 1990, 10% in 1992. 40% of the enter-
prises founded solely by legal persons were established in 1989, 30% in 1990,
20% in 1992 and 10% in 1991.
132

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
The initial capital is less than 1 million HUF in the case of 56.4% of the
interviewed enterprises, the amount was between 1 and 10 million HUF for the
35.7% and only 9 firms (6.4%) started business above that amount. The initial
capital is less than 1 million HUF for 66.7% of the individual enterprises, it is
between 1 and 10 million for the 33.3% of the them. Two-third of the co-opera-
tive enterprises had an initial capital between 1 and 10 million HUF and one-
third started operation with an amount larger than that.
Similarly to individual firms, 61.2% of the enterprises founded solely by
natural persons started business with less than 1 million HUF, 33.7% between 1
and 10 million HUF, and 3.1% (3 firms) with an amount larger than 10 million
HUF. Half of the initial capital of enterprises founded by both natural and legal
persons was less than 1 million HUF, in the case of 45% it remained under 10
million HUF, and only 1 of them (5%) started with a larger amount. An initial
capital larger than 10 million HUF was characteristic of only 40% of enterprises
founded solely by legal persons, it means 4 firms. From the enterprises belong-
ing to the other forms of ownership structures 3 had an initial capital less than 1
million HUF and 3 that is over 10 million HUF ( Table 5 and 6).
Table 5
Initial assets of the enterprises interviewed (%)
Wood
Textile and
Food
Mixed
Specification
Total
industry
cloth industry
industry
profile
Under 1 million HUF
27.2
41.8
17.6
25.0
16.7
1-10 million HUF
52.1
37.2
60.8
57.5
50.0
Over 10 million HUF
14.3
16.3
9.8
15.0
33.3
Don't know
6.4
4.7
11.8
2.5
0.0
Total
100.0
100.0
100.0
100.0
100.0
Table 6
Legal forms and the initial assets of enterprises (%)
Under 1 mil- 1-10 million Over 10 million
Specification
Don't know
lion HUF
HUF
HUF
Private firms
66.7
33.3
0.0
0.0
Co-operative associations
0.0
66.7
33.3
0.0
Businesses based exclu-
sively on private persons
61.2
33.7
3.1
2.0
Businesses based on
private and legal entities
50.0
45.0
5.0
0.0
Businesses based exclu-
sively on legal entities
30.0
30.0
40.0
0.0
Total
56.4
35.7
6.4
1.4
133

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
The share of cash in the initial capital is over 90% at 41.4% (58 firms) of
the interviewed enterprises, it is between 60-90% at 5.7% (8 firms) of the
enterprises, for 27.1% (38 firms) of the enterprises this figure is 30-60%, for
11.4% of the enterprises it is 10-30% and the share of cash was less than 10%
at 12.9% (18 firms) of the enterprises. The share of cash in the initial capital
was 10-30% at more than half; 55.6% of the individual enterprises, it was
30-60% at 22.2% of them, and for a same number this figure was above 90%.
The share of cash in the initial capital regarding enterprises founded solely by
natural persons was over 90% at 43.9% of the firms, between 60-90% at 6.1%
of the firms, 30-60% at 26.5% of the firms, 10-30% at 7.1% of the firms, and
was less than 10% at 14.3% of the firms. The share of cash in the initial capital
regarding enterprises founded by both natural and legal persons was over 90%
at 40% of them, 30-60% at 30% of the firms, the figure was less than, between
10-30% than and 60-90% for 10% of the firms in each case. At half of the 10
enterprises founded solely by legal persons the share of cash was over 90%, it
was 30-60% at 20% of the firms, 60-90% at the same number of firms, and
was less than 10% at 10% of them.
The value of present assets did not exceed 10 million HUF at 52.1% (73
firms) of the total interviewed enterprises, it was less than 1 million HUF at
27.1% (38 firms) of the firms, and it exceeded 10 million HUF only in the case
of 14.3% that is 20 firms. The value of the present assets of the 55.6% of indi-
vidual firms amounted to 1-10 million HUF, 22.2% of them have less than 1
million HUF and the present assets of the same number of firms are worth more
than 10 million HUF. Regarding property the status of the co-operative enter-
prises is the same as it was at the time of foundation. Half of the enterprises
founded solely by natural persons has present assets valued at 1-10 million
HUF, 30.6% of the firms' present assets are worth less than 1 million HUF, this
value exceeds 10 million HUF in the case of 10.2% of the firms. There were 8
enterprises (8.2%) belonging to the group with this ownership structure who did
not want to or could not answer that question. From the enterprises founded by
both natural and legal persons 65% (13 firms) has assets worth 1-10 million
HUF, 20% less than 1 million HUF, and 15% exceeding 10 million HUF.
Among the enterprises founded solely by legal persons the proportion of firms
owing assets worth more than 10 million HUF is the highest, 40% (4 firms).
30% of them have assets valued at 1-10 million HUF and the assets are worth
less than 1 million HUF in the case of 20% of the firms.
There is no foreign capital involvement in 85% (119 firms) of the inter-
viewed enterprises. There is no foreign interest in the individual or co-operative
enterprises. Foreign capital is present in 14.3% (14 firms) of the enterprises
founded solely by natural persons, in 20% (4 firms) of the enterprises founded
by both natural and legal persons, and in 30% (3 firms) of the enterprises found-
ed solely by legal persons.
134

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
One month earlier than the interviews were made the figures were as
follows regarding employment: 40.1% (55 firms) of the enterprises employed
fewer than 5 employees, 16.1% of them had 6-10 employees, 21.2% had 11-20
employees, 16.8% had 21-50 employees, 5.9% (8 firms) had more than 50 em-
ployees. Naturally on the average individual enterprises employed the fewest
employees, 55.6% of them had fewer than 5 employees, 22.2% had 6-10 em-
ployees, 11.1% had 11-20 employees and another 11.1% had 21-50 em-
ployees. 66.7% of the co-operatives employed 21-50 employees, and 33.3%
employed 6-10 employees. From the enterprises founded solely by natural per-
sons 44.2% was operating with fewer than 5 employees, 16.8% with 6-10 em-
ployees, 20% with 11-20 employees, 13.7% with 21-50 employees, and 5.3%
with more than 50 employees. According to the data on the number of em-
ployed the enterprises founded by both natural and legal persons show similari-
ties to the previous types of enterprises when 40% of them employed fewer than
5 employees, 10% had 6-10 employees, 25% had 11-20 employees, 20% had
21-50 employees, 5% had more than 50 employees. The enterprises founded
solely by legal persons are characterised by larger plant size than the average
thus the number of employed was 6-10 at 10% of the firms, 11-20 at 40% of
them, 21-50 at 30% of them, and 50 or more at 20% of the firms (Table 7).
Table 7
Legal forms and the number of employees in the enterprises
No
Specification
0-5
6-10
11-20 21-50 Over 50
Total
answer
Private firms
5
2
1
1
0
0
9
Co-operative associations
0
1
0
2
0
0
3
Businesses based exclu-
sively on private persons
42
16
19
13
5
3
98
Businesses based on
private and legal entities
8
2
5
4
1
0
20
Businesses based exclu-
sively on legal entities
0
1
4
3
2
0
10
Total
55
22
29
23
8
3
140
8.2 Characteristics and motivations of entrepreneurs
The age of the majority of entrepreneurs (74%) is between 30-50 years. 38.1%
of the entrepreneurs (32 persons) working in cities are 30-40 years old, while
another 31% (26 persons) is 40-50 years old. The proportion of both entre-
135

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
preneurs above 50 or under 30 years is at about 14%. The age of the majority of
entrepreneurs in towns, 60% (12 persons) is under 40 years, 20% of them are
40-50 years and an additional 20% is above 50 years old. One-third of the
entrepreneurs in small towns (3 persons) are 30-40 years old., two-third of them
are 40-50. The age composition of entrepreneurs in villages is similarly varied
as the one in cities, 48% (13 persons) of them are between the age of 40-50
years, 30% (8 persons) is 30-40 years old, 11% (3 persons) is younger than 25,
2 persons are 30-40 years old, and one of them is older than 50.
11.1% of the entrepreneurs at individual enterprises are less than 30 years
old, 44.4% of them are 30-40 years old, 33.3% is 40-50 years old and 11.1%
that is one person did not answer the question. From the three interviewed en-
trepreneurs at co-operatives two of them are 30-40 years old and one of them is
between 40-50. From the entrepreneurs of the enterprises founded solely by na-
tural persons 6.1% was younger than 25 years old, 10.2% that is 10 persons
25-30 years old, 38.8% is 30-40 years old, 34.7% is 40-50 years old, and
10.2% is 50 years old or older. The age composition of the entrepreneurs at the
interviewed 20 enterprises founded by both natural and legal persons is slightly
higher, 5% is 25-30 years old, 45% is 30-40 years old, 20% is 40-50 years old,
25% is over 50 years old, and one person did not answer. The age of 10% (1
person) of the entrepreneurs at enterprises founded by solely legal persons is
30-40, of 70% is 40-50, and of 20% is 50 or more (Table 8).
Table 8
The age of entrepreneurs (%)
Specification
Under 25 25-30 30-40 40-50
No
Over 50
Total
answer
Private firms
0.0
11.1
44.4
33.3
0.0
11.2
100.0
Co-operative associations
0.0
0.0
66.7
33.3
0.0
0.0
100.0
Businesses based exclu-
sively on private persons
6.1
10.2
38.8
34.7
10.2
0.0
100.0
Businesses based on
private and legal entities
0.0
5.0
45.0
20.0
25.0
5.0
100.0
Businesses based exclu-
sively on legal entities
0.0
0.0
10.0
70.0
20.0
0.0
100.0
Total
4.3
8.6
38.6
35.0
12.1
1.4
100.0
In all location category the proportion of male entrepreneurs is signifi-
cantly higher than of the female ones (78% and 22%). It is particularly true in
the case of villages where the proportion of female entrepreneurs is less than
15%. On the other hand the proportion of female entrepreneurs is the highest in
cities with 24%.
136

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
According to the data on gender the following proportion of the entrepre-
neurs are male: 88.9% (8 persons) from the 9 interviewed individual entrepre-
neurs, two-third at the co-operatives, 78.6% (77 persons) at enterprises founded
solely by natural persons, 75% at enterprises founded by both natural and legal
persons, 70% at enterprises founded solely by legal persons (Table 9).
Table 9
The sex of entrepreneurs (%)
Specification
Male
Female
Private firms
88.9
11.1
Co-operative associations
66.7
33.3
Businesses based exclusively
on private persons
78.6
21.4
Businesses based on private
and legal entities
75.0
25.0
Businesses based exclusively
on legal entities
70.0
30.0
Total
77.9
22.1
There was only 1 entrepreneur who only had primary school education.
38% of them (53 persons) earned some kind of a diploma in higher education.
16% of the interviewed (22 persons) earned a diploma in higher technical edu-
cation, 10% (14 persons) in higher economic education, 1% (person) in higher
legal education and 11% (16 persons) in other form of higher education. The
proportion of entrepreneurs graduated from secondary technical schools is
significantly high, 31% (43 persons), the other 30% either graduated from basic
vocational schools or general secondary schools. Regarding educational level
the entrepreneurs working in cities show the most varied picture (all categories
are represented), the respective figures for those graduating from different
schools are the followings 29% (24 persons) from secondary technical school,
14% (12 persons) from vocational school, 16% (16 persons) from general se-
condary school, 16% (16 persons) from technical college or university, 13% (11
persons) from economic university, 11% (9 persons) from other colleges or uni-
versities, and 1 from primary school and 1 from law school. Thus the propor-
tion of entrepreneurs having a diploma in higher education is over 40% (34 per-
sons). The majority of entrepreneurs in towns, 40% (8 persons) graduated from
secondary technical schools, the respective data for the other types of educa-
tional institutions are: in each case 15% (3 persons) from vocational school, ge-
neral secondary school, technical college or university, 5% (1 person) from
economic university and 10% (2 persons) from other college or university. 33%
(3 persons) of the entrepreneurs in small towns earned a diploma in higher
technical education, the figure is 22% (2 persons) for both secondary technical
137

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
school and economic university, 11% (1 person) for both vocational school and
general secondary school. The respective data on graduating from different edu-
cational institutions for entrepreneurs settled down in villages are the follow-
ings: 33% (9 persons) from secondary technical school, 22% (6 persons) from
general secondary school, 15% (4 persons) from basic vocational school, 11%
(3 persons) from technical college or university, 18% (5 persons) from other
colleges or universities.
The level of education of individual entrepreneurs included in this study
is characterised by the following: 44.4% of them were skilled worker, 22.2%
earned a diploma at general secondary schools, 11.1% graduated from technical
college or university, and 22.2% graduated from other colleges or universities
(Table 10).
Table 10
The structure of business owner's education (%)
C
Businesses
Businesses
Businesses
o-o era
era-
Private
Specification
.
- based exclu- based on pri- based exclu-
firms
sively on pri-
Total
ciations
vate and
sively on le-
vate persons legal entities gal entities
Primary school
0.0
0.0
0.0
5.0
0.0
0.7
Vocational school
44.4
0.0
14.3
5.0
10.0
14.3
Secondary techni-
cal school
22.2
0.0
33.7
35.0
10.0
30.7
General secondary
school
0.0
33.3
18.4
10.0
20.0
16.4
Higher technical
education
11.2
0.0
15.3
10.0
40.0
15.7
Higher economic
education
0.0
0.0
7.1
25.0
20.0
10.0
Higher law edu-
cation
0.0
0.0
1.0
0.0
0.0
0.7
Other higher
education
22.2
66.7
10.2
10.0
0.0
11.5
Total
100.0
100.0
100.0
100.0
100.0
100.0
One-third of the entrepreneurs at co-operatives earned a diploma from ge-
neral secondary school and two-third of them from other colleges or universi-
ties. From the entrepreneurs working at enterprises founded solely by natural
persons 33.7% (33 persons) graduated from secondary technical schools, 18.4%
from general secondary school, 15.3% from technical college or university,
14.3% was skilled worker, 10.2% earned a diploma at other college or universi-
ty, 7.1% at economic university, and 1% at law school. The respective data for
entrepreneurs at enterprises founded by both natural and legal persons are: 35%
(7 persons) earned a diploma at secondary technical school, 25% at economic
138

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
university, 10% at general secondary school, 10% at technical college or univer-
sity, 10% at other college or university, 5% finished primary school, and 5%
basic vocational school. From the entrepreneurs at enterprises founded solely by
legal persons 40% graduated from technical college or university, 20% from
economic university, 20% from general secondary school, 10% from secondary
technical school, and 10% from basic vocational school.
38% (53 persons) of the interviewed entrepreneurs previously worked as
a manager, 26% (36 persons) of them as clerical worker, 21% (29 persons) as
skilled worker, and 11% (15 persons) of them were the owner or co-owner of
another private firm. There was no one among the interviewed who started bu-
siness because of being unemployed, and it was the first job experience for only
2% that is 3 persons. In the category of big city, that is in Pecs, the proportion
of managers was 40% (34 persons), 24% (20 persons) was former clerical
workers and an additional 24% (20 persons) was skilled workers previously,
and 6% (5 persons) owned another firm or was a co-owner in it. The proportion
of entrepreneurs having previous experiences as owners was higher with its
30% in towns, while the proportion of managers was smaller, 25%, and this
figure is 35% for clerical workers. 11% of the entrepreneurs living in small
towns or villages gained previous experience as owners. The proportion of
former clerical workers is most significant with its 44% in small towns. 40% of
the interviewed entrepreneurs in villages previously held a manager position.
Analysing the data on the entrepreneurs' previous job we got the follow-
ing results (Table 11).
Table 11
Business owners' former profession (%)
Businesses Businesses Businesses
Co-ope-
Private
based exclu- based on pri- based exclu-
Specification
rative asso-
Total
firms
sively on pri- vate and sively on le-
ciations
vate persons legal entities gal entities
Owner of another
private company
11.2
0.0
13.3
5.0
0.0
10.7
Manager
0.0
33.3
35.7
50.0
70.0
37.9
Clerical worker
44.4
66.7
22.4
30.0
20.0
25.7
Skilled worker
44.4
0.0
21.4
15.0
10.0
20.8
Unskilled worker
0.0
0.0
1.0
0.0
0.0
0.7
None of the above
(first job)
0.0
0.0
3.1
0.0
0.0
2.1
None of the above
(unemployed)
0.0
0.0
0.0
0.0
0.0
0.0
Other
0.0
0.0
3.1
0.0
0.0
2.1
Total
100.0
100.0
100.0
100.0
100.0
100.0
139

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
From the individual entrepreneurs 44.4% were clerical worker and an-
other 44.4% skilled worker, 11.1% was owner or co-owner at another private
enterprise. At the 3 co-operative enterprise two-third of the entrepreneurs was
clerical worker, one-third was manager. The data on entrepreneurs working at
enterprises founded solely by natural persons show that previously 35.7% of
them worked as manager, 22.4% was clerical worker, 21.4% was skilled work-
er, 13.3% was the owner of another private enterprise, 1% was unskilled work-
er and this was the first job of 3 persons, 3.1%. Half of the entrepreneurs at
enterprises founded by both natural and legal persons was a manager before,
30% of them were clerical workers, 15% worked as skilled worker. The data on
entrepreneurs at enterprises founded solely by legal persons showed the highest
proportion of former managers, 70%, an additional 20% was clerical worker
and 10% was skilled worker.
At the 57% (80 firms) of interviewed enterprises the natural person
owner(s) is(are) employed full-time and they have a part-time job at an addi-
tional 19% (26 firms) of the firms. The owners are not employed at 16% (23)
of the firms. The proportion of owners employed by their own enterprise is the
highest in Pecs 61%, the figure is 60% in towns, 56% in small towns, and the
lowest, 44% in villages. Among the interviewed the proportion of not employed
owners is the highest in small towns and villages 22% in each case, and the
lowest, 14% in Pecs.
From the employed owners 63% (88 persons) is a manager or a director,
10% (14 persons) is a clerical worker, 19% (27 persons) is skilled worker, 4%
(5 persons) is unskilled worker. The proportion of managers among the em-
ployed owners is decreasing in relation to the size of the settlement of the firm's
location, while this figure is 68% in Pecs, it is only 48% in the case of villages.
The proportion of clerical workers among the employed owners is the highest
in villages 19%, 5 persons.
The natural person owner or owners were employed full time at all of the
firms, 77.8% of them hold a manager position, 33.3% is employed as clerical
worker, 44.4% as skilled worker, 33.3% as unskilled worker. Among the own-
ers of the co-operative enterprises 33.3% was employed full time and 33.3%
was part-time in a manager position or worked as clerical worker. 58.2% of the
owners of enterprises founded solely by natural persons were employed full-
time (an additional 21.4% in part-time), 66.3% of them worked as manager,
8.2% as clerical worker, 18.4% as skilled worker, and 2% as unskilled worker.
65% of the natural person owners of the enterprises founded by both natural and
legal persons were employed full-time and 20% in part-time, 75% of them hold
a manager position, 10% worked as clerical worker, 25% as skilled worker.
For the question about the most important motivation for starting up a
new business 16% of the interviewed gave the answer of „the need for self-fill-
140

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
filment", 19% „the need for independence", 2% „the need to take risk and to
test one's ability", 37% „the need to gain more money", 11% „the unemploy-
ment'',  4%  „the continuation of family traditions". Nobody chose „imitation of
friends and relatives" or „restitution of properties taken over by the state in the
past" as motivation factors. To some extent 26% of the entrepreneurs in Pecs,
35% in towns, 11% in small towns, 33% in villages consider self-fulfilment an
important factor (according to the questionnaire the order of importance: most
important, very important, moderately important). The need for independence is
most emphasised by the entrepreneurs (44%) in Pecs, it is considered important
by 40% of the entrepreneurs in towns, 22% in small towns and 18% in villages.
According to 58% of the entrepreneurs (61% in Pecs, 60% in towns, 78% in
small towns, 41% in villages) earning higher income is in some way a motiva-
tion factor. Entrepreneurs in small towns felt the most strongly about unemploy-
ment, 44% of them marked it, while in the other types of settlement the propor-
tion was only between 18-25%. The continuation of family traditions did not
appear important, the highest figure 15% was in villages  (Table 12 and 13).
Table 12
The most important )  motivations for setting up a business activity in
relation to the  company's location  (number of answers)
Town of
Town of
Town of
Motivation
over 100
20-100
under 20
Village
Total
thousand
thousand
thousand
dwellers
dwellers
dwellers
Need for self-fulfilment
22
7
1
9
39
Need for independence
37
8
2
5
52
Need to take risk and to
taste one's ability
15
3
2
3
23
Need to gain more money
51
12
7
11
81
Unemployment
15
5
4
5
29
Following the example of
friends and relatives
0
0
0
0
0
Continuation of family
traditions
7
1
1
4
13
Reprivatisation of formerly
nationalised property
0
0
0
0
0
Other
11
4
0
7
22
Total
158
40
17
44
259
1  Enumerated by the interviewees on the first position
141

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 13
The most important )  motivations for setting up business activity (%)
Businesses
Businesses
Businesses
Private
based exclu- based on ri
exclu-
p- based exclu-
Motivation
C
rativo-e°aPe
ss-o-  •
firms
sively on pri-
vate and
sively on
Total
ciations
vate persons legal entities legal entities
Need for self-ful-
filment
11.1
0.0
19.4
10.0
10.0
16.4
Need for inde-
pendence
11.1
0.0
21.4
25.0
0.0
19.3
Need to take risk
and to taste
one's ability
0.0
0.0
3.1
0.0
0.0
2.1
Need to gain
more money
55.6
33.3
32.7
40.0
60.0
37.1
Unemployment
22.2
0.0
9.2
20.0
0.0
10.7
Following the ex-
ample of friends
and relatives
0.0
0.0
0.0
0.0
0.0
0.0
Continuation of
family traditions
0.0
0.0
5.1
0.0
0.0
3.6
Reprivatisation of
formerly nationa-
lised property
0.0
0.0
0.0
0.0
0.0
0.0
Other
0.0
33.3
11.2
15.0
30.0
12.9
1  Enumerated by the interviewees on the first position
For the question on the motivations for starting up a new business the fol-
lowing answers were given, the respective percentage is indicated; need for
self-fulfilment by 11.1%, need for independence by 11.1%, need for higher in-
come by 55.6%, unemployment by 22.2%. 33.3% of the entrepreneurs at co-
operative enterprises found higher income, and 33.3% independence as impor-
tant motivation factors. For the entrepreneurs at enterprises founded solely by
natural persons the most important motivation factors were self-fulfilment,
19.4%, need for independence, 21.4%, need to test one's ability, 3.1%, need to
earn higher income, 32.7%, unemployment, 9.2%, to continue family traditions,
5.1%. The entrepreneurs at enterprises founded by both natural and legal per-
sons found the followings the most important motivation factors: self-fulfil-
ment, 10%, need for independence, 25%, higher income, 40%, unemployment,
20%. The entrepreneurs at enterprises founded solely by legal persons saw self-
fulfilment 10%, and unemployment, 60%, as the most important motivation
factors.
The decisive majority of the initial capital of the interviewed enterprises
was originated from own savings accumulated in Hungary. For 65% (91 firms)
142

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
of the entrepreneurs this was the only source of initial capital. Two-third of the
initial capital was made up by it for 6% (4 firms) of the enterprises. Half of the
initial capital came from this source for 10% (14 firms) of the ventures, and a
quarter of it for 1.4% (2 firms). This source of capital played the most important
role in cities, where 84% of the enterprises counted on it to the extent of
25-100% of their capital. The importance of this source was the lowest in small
towns. Money earned abroad was used to start business by only two entrepre-
neurs in Pecs covering 50 or 75% of the initial capital. 9% that is 12 entrepre-
neurs asked for loans from friends or relatives, from them 5 are pursuing busi-
ness in villages, it means 19% of the enterprises operating in villages. (2 persons
— 1 in Pecs, the other in town — covered their initial capital fully from this
source.) The initial capital, at least in part, originated from capital from foreign
private enterprises and joint ventures in the case of 10% of the enterprises. (The
capital of 2 firms in Pecs, and 1 in a town and another one in small town was
fully covered by it) This source played some role in the foundation of 12% of
the enterprises in cities, 10% of firms in towns, 11% of firms in small towns,
and 4% in villages. Only two enterprises in Pecs obtained loans from foreign
banks and financial institutions, it covered 100% of the needed initial capital. It
means 1.4% of the total enterprises. Loans from government or local govern-
ments were provided to start up business for 7% (10 firms) of the enterprises, it
includes 4 firms in Pecs (5% of the total number of firms in cities), 2 firms
(7.4%) in villages. The amount covered the 100% of the initial capital. 13% of
the firms used other sources for setting up business. the proportion of other
sources was the highest, 33% in small towns  (Table 14).
Table 14
Sources of initial capital in relation to the
company's location (number of answers)
Town of Town of  Town of
over 100 20-100
under 20
Sources of initial capital
Village
Total
thousand thousand  thousand
dwellers dwellers
dwellers
Personal savings
70
16
5
22
113
Money earned abroad
2
0
0
0
2
Loans from friends and relatives
3
3
0
5
11
Capital from private foreign
enterprises or joint ventures
9
2
1
1
13
Loans from foreign banks or other
foreign financial institutions
2
0
0
0
2
Money from government or local
authorities
7
1
0
2
10
Other
9
2
3
4
18
Total
102
24
9
34
169
143

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Regarding individual enterprises the source of initial capital was own
savings accumulated in Hungary for 66.7% of them, 11.1% got loans from
friends and relatives. 66.7% of the co-operative enterprises started up new
business only on own savings accumulated in Hungary, 33.3% ensured three-
quarter of the needed capital from this source. With respect to enterprises
founded solely by natural persons the source of the total initial capital was own
savings accumulated in Hungary for 67.3%, capital gained from foreign private
or joint enterprises for 3.1%, loans from foreign banks for 2%, loans provided
by the government or local governments for 5.1%. 65% of the enterprises
founded by both natural and legal persons could start up business exclusively
on own savings accumulated in Hungary, 10% of them covered half of the
needed capital by capital from foreign private ventures, and 5% obtained loans
provided by the government or local governments. The whole initial capital is
originated from own savings accumulated in Hungary for 40% of the enter-
prises founded solely by legal persons, from capital of foreign private firms for
10% and other sources for 20%  (Table 15).
Table 15
Source of initial capital (number of answers)
Businesses
Businesses
Businesses
Co-opera-
Sources of initial
Private  .
based exclu- based on pri-  based exclu-
tive ass
capital
. as
firms
Total
ciatialso-srvely on pri-
vate and
sively on le-.
vate persons  legal entities  gal entities
Personal savings
6
3
87
13
4
113
Money earned abroad
0
0
2
0
0
2
Loans from friends and
relatives
2
0
9
0
0
11
Capital from private
foreign enterprises or
joint ventures
0
0
7
2
4
13
Loans from foreign
banks or other foreign
financial institutions
0
0
2
0
0
2
Money from government
or local authorities
1
0
8
1
0
10
Other
1
1
8
4
4
18
Total
10
4
123
20
12
169
8.3 Factors of production
From the 140 interviewed small enterprise 84.3% had employees. 40% of the
enterprises employed more than 10 persons, 23% of them had 1-5 employees.
The enterprises with higher number of employees are not particularly character-
istic of towns, since while the proportion of enterprises employing more than 10
144

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
employees is 41.8% in Pecs, this figure is 55.5% in small towns and 33.3% in
villages. On the other hand the proportion of enterprises employing more than
20 employees is very low in villages, only 3.8% (Table 16 and 17).
Table 16
Number of regular employees in relation to the company's location (%)
Town of over Town of 20-100 Town of under
Number of regular 100 thousand
thousand
20 thousand Village
Total
employees
dwellers
dwellers
dwellers
None
14.3
15.0
33.3
14.8
15.7
One
4.8
0.0
0.0
11.1
5.0
2-5
25.0
30.0
11.1
14.8
22.9
6-10
11.9
20.0
0.0
25.9
15.0
11-20
19.0
10.0
22.2
29.6
20.0
Over 20
23.8
20.0
33.3
3.8
20.0
No answer
1.2
5.0
0.0
0.0
1.4
Total
100.0
100.0
100. 0
100.0
100.0
Table 17
Number of regular employees in relation to the type of enterprises (%)
Businesses
Businesses
Businesses
Number of
Co-ope-
Private
based exclu- based on pri- based exclu-
regular
rative asso- . .
Total
firms
sively on pri- vate and legal sively on le-
employees
ciations vate persons
entities
gal entities
None
11.1
0.0
20.4
5.0
0.0
15.7
One
11.1
0.0
5.1
5.0
0.0
5.0
2-5
44.5
0.0
23.5
25.0
0.0
22.9
6-10
11.1
33.3
14.3
20.0
10.0
15.0
11-20
11.1
0.0
19.4
20.0
40.0
20.0
Over 20
11.1
66.7
15.3
25.0
50.0
20.0
No answer
0.0
0.0
2.0
0.0
0.0
1.4
Total
100.0
100.0
100.0
100.0
100.0
100.0
There is a quite diverse picture of the types of employees at small en-
terprises. The four studied groups (manager, clerical worker, skilled worker,
unskilled worker) show an uneven distribution among the enterprises. There are
no managers at 68.6% of the small enterprises, and no clerical workers at 65%
of them, 26.6% does not employ skilled worker, and 57.1% does not employ
unskilled worker. Since the more diversified ventures are located in Pecs it is
understandable that one-third of the organisations there employees 1-5 mana-
gers. Only one-fifth of the enterprises in villages employees one manager. We
found similar ratios with respect to clerical workers.
145

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
The size and the type of activities of an enterprise determine the employ-
ment of qualified worker. Three-quarter of the enterprises located in Pecs em-
ployees skilled worker, and 60% of the skilled workers employed by small
enterprises in the county are working in Pecs. It is a good sign that the ratio of
unskilled workers is 42.9% in the county, while it is 34.5% at firms in Pecs.
The unfavourable situation of the labour market in Baranya county is re-
flected in the answers given to the question on labour market supply for small
enterprises. The relatively high (12.3%) unemployment rate is in the enter-
prises' favour since it is easier to find labour force.
Regarding all groups of employees the majority of the interviewed firms
did not have any difficulty in recruiting workers. Firms having manager or
clerical worker position could find somebody to employ almost immediately, it
was a little bit more difficult to find skilled worker, 25% of the entrepreneurs
met with some problems  (Table 18).
Table 18
Recruitment of what employees posed problems for the enterprises
(number of answers)
Businesses
Co-opera-
Businesses
Businesses
Private
Specification
tive asso_ based exclu- based on pri- based exclu-
Total
firms
sively on pri- vate and legal sively on le-
ciations vate persons
entities
gal entities
Managers
0
0
3
0
0
3
Clerical workers
0
2
0
0
3
Skilled workers
2
23
8
1
35
Unskilled workers
0
0
10
0
2
12
Total
1
3
38
8
3
53
A typical characteristic of small enterprises is that they have only one
site — operating in a building. 86% of them are operating in one building, 6.4%
of them in two and 5% in more than two buildings. One-third of them rent the
place of operation, and two-third of them owns it  (Table 19).
Table 19
Buildings used by the enterprises (number of answers)
Co-o e-
Businesses Businesses Businesses
p
Private
Specification
rative asso- based exclu- based on pri- based exclu-
sively on pri- vate and sively on le- Total
'Inns
ciations vate persons legal entities gal entities
Own buildings
6
3
44
6
3
62
Rented buildings
3
0
59
14
7
83
No answer
0
0
2
0
0
2
Total
9
3
105
20
10
145
146

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
92.1% of the enterprises use machinery-equipment 34.3% of them use
less than 5, 21.4% between 5-10 and 30.7% use more than 10 machineries-e-
quipments. The firms own the majority of the machinery-equipments. Non of
the enterprises used the leasing technique.
The quality of the building stock shows the peculiarities of the Hungarian
enterprise development. Since most of the enterprises burst into business life the
entrepreneurs operating their business with a lack of capital rather financed the
improvement of machinery and equipment than the investments on buildings
from sources separated for investments. Thus 60.7% of the operating enterprises
do business in buildings that was not built for the purpose of production. It is
probable that the higher prices of real property account for that the highest ratio
(66.7%) is in Pecs (Table 20 and 21).
Table 20
Were the buildings designed for the current manufacturing process? (%)
Businesses Businesses
Businesses
Co-ope-
Private
based exclu- based on pri- based exclu-
Specification
ratw
.e assn-
Total
firms
sively on pri- vate and sively on legal
ciations
vate persons legal entities
entities
Yes
66.7
33.3
37.8
35.0
40.0
39.3
No
33.3
66.7
62.2
65.0
60.0
60.7
Total
100.0
100.0
100.0
100.0
100.0
100.0
Table 21
Were the buildings designed for the current manufacturing process? (%)
Town of over Town of 20-100 Town of under
Specification
100 thousand
thousand
20 thousand Village
Total
dwellers
dwellers
dwellers
Yes
33.3
45.0
55.6
48.1
39.3
No
66.7
55.0
44.4
51.9
60.7
Total
100.0
100.0
100.0
100.0
100.0
An almost accurate information is given on the technical status of enter-
prises by the data about the age of machinery and equipment. Though the age is
not an entirely reliable source for qualifying the technical-technological status,
these data can indicate the quality of the produced products. Regarding the tech-
nical status of the technological machinery-equipment the situation is not too fa-
vourable. The average age of the machinery is more than one year at 72.9% of
147

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
the interviewed enterprises. The ratio of the 1-5 year old machinery is 52.9%,
also the ratio of the 6-15 year old machinery is high too (32.1%). The outdated
technology is especially characteristic to enterprises in Pecs, where the propor-
tion of the 15 year old machinery is high regardless of the size of the firm
(Table 22).
Table 22
Average age of the machinery used by the enterprises
(number of answers)
Co-ope-
Businesses Businesses Businesses
Private
based exclu- based on pri- based exclu-
Average age
rative asso-
firms
Total
ciations
sively on pri- vate and sively on le-
vate persons legal entities gal entities
Under one year
1
1
28
5
1
36
1-5 years
4
1
46
9
2
62
6-15 years
3
1
63
16
6
89
Total
8
3
137
30
9
187
There is a similarly unfavourable situation regarding the proportion of
used machinery. 65% (69% in Pecs) of the firms operate with only used machi-
nery. Only one-tenth of the enterprises work with entirely new machinery and
equipment, and the ratio of used machinery is less than 50% at only 2.9% of
them (Table 23).
Table 23
Share of second hand machinery in its total amount (%)
Businesses Businesses Businesses
Private Co-operative based exclu- based on based exclu-
Share
firms associations sively on pri- private and sively on
Total
vate persons legal entities legal entities
None
22.2
0.0
18.3
10.0
20.0
17.1
1-50%
0.0
0.0
4.1
0.0
0.0
2.9
51-99%
11.1
33.3
14.3
15.0
10.0
14.3
100%
66.7
66.7
62.3
75.0
70.0
65.0
No answer
0.0
0.0
1.0
0.0
0.0
0.7
Total
100.0
100.0
100.0
100.0
100.0
100.0
The supply of computer technology is poor at the enterprises. 35.7% of
them have computers, there is no difference between the enterprises in towns or
in villages. Though 86.4% of them use computers for office work and 77.1%
for management purposes through other organisations. The application of mo-
dern methods in production management is not widespread yet (Table 24).
148

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 24
The supply of computer technology (%)
Town of over Town of 20-100 Town of under
Specification
100 thousand
thousand
20 thousand
Village
Total
dwellers
dwellers
dwellers
Yes
36.9
25.0
44.4
37.0
35.7
No
63.1
75.0
55.6
63.0
64.3
Total
100.0
100.0
100.0
100.0
100.0
35% of the firms do not keep stockpiles. 29.3% of them operate with  a
stock lower than 25% of the turnover, half of them operate with a stock between
50-75% of it, and the stock is greater than the turnover only at 5% of the firms
(Table 25).
Table 25
Share of stockpiles on firms turnover (%)
Businesses
Businesses
Businesses
Private  Co-operative based exclu-
based on
based exclu-
Share
Total
firms
associations sively on pri-
private and
sively on
vate persons  legal entities  legal entities
None
55.6
33.3
31.6
30.0
60.0
35.0
1-25%
22.2
66.7
28.6
30.0
30.0
29.3
26-50%
0.0
0.0
20.4
15.0
10.0
17.1
51-75%
0.0
0.0
5.1
0.0
0.0
3.6
76-100%
0.0
0.0
3.1
0.0
0.0
2.1
Over 100%
11.1
0.0
1.0
25.0
0.0
5.0
No answer
11.1
0.0
10.2
0.0
0.0
7.9
Total
100.0
100.0
100.0
100.0
100.0
100.0
The extremely low import component of the products made by small en-
terprises is shown by the fact that only 26.4% of the interviewed firms have
stock with foreign origin. We found similar ratios in all settlement categories.
The share of imported goods is above 50% in the total stockpile only at 9.3% of
the firms.
The majority of the enterprises (82.1%) does not use intermediate goods.
They purchase raw material, complementary goods and energy. 9.2% of the in-
terviewed buy the intermediate goods from local (county) producers, 10.1% buy
them from Hungarian suppliers, and 1.4% obtains them from foreign sources.
Regarding the share of intermediate goods we found only a few enterprises that
buy more than half of the products from foreign suppliers. The enterprises pur-
chasing 75-100% from outsiders get their product from local or national pro-
ducers in a similar ratio. In this category group only 6 enterprises have contacts
with foreign suppliers.
149

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
8.4 Products, markets, competitors
Decisively concentrated product scale characterises the activities of the inter-
viewed enterprises: principal product represented a proportion between 75 and
100% of the total sales at three-quarter (75.7%) of the enterprises, and 64% of
the firms do not have „a second most important product". Totally 30 entrepre-
neurs indicated a second important product (21.4%), five (3.6%) indicated a
third product and only one marked fourth and fifth product. The proportion of
products other than the principal product in total sales was less than 25%: from
the 30 enterprises 10 indicated a 25 to 50% proportion of sales for the second
most important product.
There is no significant difference in the concentration of the product scale
(homogeneity of the activities) as to the location of the enterprise, or its form of
ownership. More diversified products (only up to 2 products) are present at a re-
latively large proportion of enterprises operating in towns with a population less
than 20 thousand (small towns), and beyond that in Pecs, where the number of
products are 3, 4 or 5 some times.
With respect to the distribution of ownership structure a more varied scale
of products can be found at individual enterprises and enterprises founded solely
by legal persons, although together they account only for a smaller number of
the total interviewed firms, one-seventh of them.
81.4% of the enterprises carry out all phases of production themselves,
they do not co-operate. Considering that an overwhelming majority of the enter-
prises are organisations operating with only few employees, fewer than 20 per-
sons, it also means that the main output determining the homogenity of the pro-
duction is a relatively simple product, it goes through only a small number of
production phases and does not require the involvement of specialised organi-
sations.
Regarding the _location of the enterprises external co-operation charac-
terises the organisations in Pecs and in small towns, while considering owners
this is a characteristic of enterprises founded solely by natural persons, however
it means only a small divergence compared to the situation characterising the
total sample (Table 26).
The main form of co-operation in production is subcontracting (half of
the 26 enterprises indicating co-operation preferred it), first of all, to domestic
entrepreneurs (in 11 cases) working with few employees (fewer than 5) or to
local enterprises (8 cases) with few employees. Only 5 of the interviewed enter-
prises established co-operation with foreign companies (these are firms with
foreign capital interest).
150

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 26
Does the firm carry out all phases of production?
Yes
No
Total
Specification
Number of
%
Number of
%
Number of
%
answers
answers
answers
Town of over 100 thousand
dwellers
67
79.8
17
20.2
84
60.0
Town of 20-100 thousand
dwellers
17
85.0
3
15.0
20
14.3
Town of under 20 thousand
dwellers
7
77.8
2
22.2
9
6.4
Village
23
85.2
4
14.8
27
19.3
Total
114
81.4
26
18.6
140
100.0
Private firms
9
100.0
0
-
9
6.4
Co-operative associations
2
66.7
1
33.3
3
2.1
Businesses based exclusi-
vely on private persons
77
78.6
21
21.4
98
70.0
Businesses based on pri-
vate and legal entities
17
85.0
3
15.0
20
14.3
Businesses based exclu-
sively on legal entities
9
90.0
1
10.0
4
7.1
Total
114
81.4
26
18.6
140
100.0
The composition of total sales by targets is characterised by an even dis-
tribution (diversification, if you wish), among final consumers, retail shops,
wholesalers, manufacturing firms. All interviewed enterprises had their own
shop, but do not have an own network of shops (characteristically, one or two
shops are operated either at the plant site or at the settlement) (Table 27).
Almost all enterprises used the above mentioned four channels of distri-
bution to some extent, though the most important buyers (with a ratio of sales
above 50%) of the firms' product were the final consumers for 24%, the retail
shops for 18%, wholesalers for 12%, and manufacturing firms for 23% of the
enterprises. According to the answers all channels of distribution mean a sale re-
lation with several organisations of similar type at the same time. It was observ-
ed that the most important client bought more than half of the sold products at
37% of the enterprises, and half of the sales were absorbed by the five most im-
portant clients only at 38% of the firms. It means that usually there is only one
important client, and the others are smaller ones with similar significance.
Thus while the activity is characterised by a production with few phases,
reliance on one or only a few products and a low frequency of production co-
operation, in summary by a simple production character, the sale is character-
ised by extended market relationships with large number of contacts.
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 27
The main buyers of firm products (number of answers)
Final con-
Specification
Retail
Manufacturing
sumers
Wholesalers
shops
Total
firms
Town of over 100
thousand dwellers
23
15
9
15
62
Town of 20-100
thousand dwellers
2
5
2
7
16
Town of under 20
thousand dwellers
1
3
1
1
6
Village
8
4
4
9
25
Total
34
27
16
32
109
Private firms
3
2
1
0
6
Co-operative associations
0
0
1
2
3
Businesses based exclu-
sively on private persons
29
20
8
19
76
Businesses based on pri-
vate and legal entities
2
3
5
6
16
Businesses based exclu-
sively on legal entities
0
2
1
5
8
Total
34
27
16
32
109
The enterprises in their first phase start according to their market opportu-
nities, not depending upon the concentration of demand, and undertake the ma-
nufacturing of one or two products that are the simplest, require the smallest ca-
pital and can be brought into being the fastest. A more difficult product (ser-
vice), a more diversified production, and the need for co-operation would re-
quire longer preparation (and probable large capital accumulation), therefore the
second phase of the diffusion and strengthening of the enterprise, or the second
generation, will be characterised by them. At that time though the sales relation-
ships will be more concentrated and probably more stable. This above men-
tioned sales diversity also means that up to now sales channels and long-term
partner relationships have not been established, and the majority of the enter-
prises sell (distribute) their products by themselves on the market (not relying
on specialised organisations).
According to the geographical location of the enterprises the structure of
sales relations shows that the market relations of the enterprises in small villages
are the most concentrated (93% of them are using one of the first four channels
to distribute more than half of their product, within it the final consumers and
the manufacturing firms are the most important, additionally the most important
client accounts for more than half of the sales at 60% of the enterprises in vil-
lages, moreover it is not characteristic to establish a significant sales relationship
with more than five clients). Among the other groups the distribution picture by
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
sales partners is the most varied at enterprises in Pecs. Enterprises in towns are
concentrated in terms of the number of important clients, and these clients are
typically retail shops and manufacturers. In the case of small town enterprises,
partly because of the small sample, there is no significant concentration, their
sales relations are individual and rather scattered  (Table 28).
Table 28
Degree of company's dependence on one to five most important clients
(number of answers)
The most important  Five most important
Specification
Total
client buys 50-100%  clients buy 50-100%
Town of over 100
thousand dwellers
30
29
59
Town of 20-100
thousand dwellers
4
12
16
Town of under 20
thousand dwellers
2
2
4
Village
16
10
26
Total
52
53
105
Private firms
1
4
5
Co-operative associations
3
1
4
Businesses based exclusi-
vely on private persons
29
36
65
Businesses based on pri-
vate and legal entities
11
9
20
Businesses based exclusi-
vely on legal entities
8
3
11
Total
52
53
105
In the examination of sales relations from the point of view of owner-
ship structure it seems to be the most important of the characteristics that firms
owned partly or entirely by legal persons are in connection with fewer and more
determinant partners, and sell primarily to wholesalers and manufacturers. The
dispersal of sales is characteristic mainly in the case of individual enterprises
or enterprises founded solely by natural persons. Co-operative, although being
composed of individuals, can rather be included in the first (legal entity) group.
86% of the responding enterprises were able to identify the typical geo-
graphical location of their sales market. Accordingly, the majority of them
(52%) sells in their respective local (regional) markets, that is, more than 50%
of their sales are directed to these markets. Next is the domestic (national)
market (27%), while at 21% of the firms more than half of the sales are directed
to Western (European or other developed) country (these can be most appro-
priately described as OECD countries). According to geographical location of
foreign sales partners the former COMECON countries are mentioned only in
very few cases, representing insignificant proportion of sales.
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Two-third of the firms in villages claimed that their local (regional)
market is the most important, and only 13% of them sells the majority of output
abroad. In the group of enterprises in towns and small towns the foreign sales
orientation is above average, however, the proportion of national and local mar-
kets together still represents more than two-thirds (within which local, regional,
and national markets have approximately similar weights). The Pecs firms, na-
turally, represent the average values here as well.
From the ownership viewpoint it is characteristic, too, that the domestic
market direction has a weight of at least two-thirds at each organisational form.
Within this, business associations founded solely by natural persons or natural
and legal persons (which have decisive weight in the sample) work primarily
for the local market, this orientation is mentioned twice more frequently than
the national market. Foreign sales (which, as it has been shown above, means
only developed Western countries) are represented by above the average values
only in the case of organisations owned partly or entirely by legal persons. Indi-
vidual entrepreneurs did not mention such a significant ratio of sales at all, even
in the case of enterprises founded solely by natural persons only 18% of them
sell primarily abroad (Table 29).
Table 29
Geographical structure of SMEs' sales market (number of answers)
Specification
Local
National COMECON Western
market
market
countries
countries
Total
Town of over 100
thousand dwellers
36
20
0
14
70
Town of 20-100
thousand dwellers
8
5
0
6
19
Town of under 20
thousand dwellers
3
3
0
2
8
Village
16
5
0
3
24
Total
63
33
0
25
121
Private firms
3
5
0
0
8
Co-operative associations
1
1
0
1
3
Businesses based exclusi-
vely on private persons
47
21
0
15
83
Businesses based on pri-
vate and legal entities
9
4
0
7
20
Businesses based exclusi-
vely on legal entities
3
2
0
2
7
Total
63
33
0
25
121
Almost one-quarter of the enterprises (23%) believes that they have no
significant competitor. Within this primarily firms in villages and towns, or ac-
cording to the form of organisation, co-operatives and firms owned entirely or
partly by legal persons feel that the market lacks competitors.
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
The 108 organisations that believe that they work in the presence of
competitor(s) named 1,3 strong competitive firms on the average. Half of these
mention individual entrepreneurs as major competitors, next are private firms
(34%) and state owned enterprises (27%).
From the firms in Pecs 81% answered that they have one or more compe-
titor present in the market. Out of these 54% named individual entrepreneurs,
and 38% private firms, as major rivals. In the case of groups of other location
the distribution of types of competitors is more even, but most frequent ones are
almost always individual entrepreneurs and private firms. The only exception is
the group of village business organisations, where half of the respondents who
mentions significant competitor(s) names state owned enterprises as most im-
portant.
There is no significant difference regarding the type of competitors a-
mong groups of respondents according to ownership structure (Table 30).
Table 30
Organisational and legal forms of SMEs' competitors (number of answers)
Individual
State Co-
No-
Private
Impor-
Specification
entre-
owned
owned opera- Others Total
body
firms

preneurs firms tives
Town of over 100
thousand dwellers
16
37
26
15
3
3
4
104
Town of 20-100
thousand dwellers
7
5
3
3
1
2
0
21
Town of under 20
thousand dwellers
2
3
2
1
0
2
1
11
Village
7
9
6
10
3
0
0
35
Total
32
54
37
29
7
7
5
171
Private firms
1
4
3
0
0
1
2
11
Co-operative
associations
1
1
1
0
0
0
0
3
Businesses based
exclusively on
private persons
21
40
27
21
6
3
3
121
Businesses based
on private and le-
gal entities
6
8
4
4
1
2
0
25
Businesses based
exclusively on
legal entities
3
1
2
4
0
1
0
11
Total
32
54
37
29
7
7
5
171
A very vague tendency may be noticed perhaps that proceeding from in-
dividual entrepreneurs to organisations owned entirely by legal persons the
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
named competitors are increasingly compound organisations (private firms,
state owned enterprises, co-operative firms, importer organisations, etc.) That is,
private firms and business organisations of solely private individuals are the
main competitors, however, the perceived competitors are characterised accord-
ing to the form and size of the respondent organisation, and the relatively typi-
cal competitor group has similar properties (for example, individual entrepre-
neur for individual entrepreneur, or state owned firm for business organisation
of legal persons, etc.) .
Half of the perceived strongest competitors are local ones (working with-
in the county). About 40% of the respondents referred to domestic competitors
out of their respective region, and only one-tenth of the respondents mentioned
foreign competition.
Groups of respondents according to geographical location and owner-
ship structure produced the same distribution almost to the one percent accuracy
as a result of their answers (Table 31).
Table 31
Location of SMEs' strongest competitors (number of answers)
Specification
Local
National
Foreign
Total
Town of over 100
thousand dwellers
33
32
9
74
Town of 20-100
thousand dwellers
9
5
1
15
Town of under 20
thousand dwellers
4
3
1
8
Village
14
8
1
23
Total
60
48
12
120
Private firms
4
4
1
9
Co-operative associations
1
1
1
3
Businesses based exclusi-
vely on private persons
44
35
8
87
Businesses based on
private and legal entities
7
7
0
14
Businesses based exclusi-
vely on legal entities
4
1
2
7
Total
60
48
12
120
Regarding the advantages of competitors and the disadvantages of own
firms approximately the same number of answers were received. About 32% of
the respondents do not feel specific advantage of their competitors, and 23%
of them do not feel own weakness. (These ratios are approximately the same
through the various business groups.) These are the most frequent answers, too.
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Next to the answer that the competitor has no advantage at all, the second most
frequent answer (25%) is, surprisingly, the larger plant size (seen this way espe-
cially by non-Pecs town and village firms), then capital strength is the third
factor mentioned by 21% of the firms as one of the important advantage of the
competitor. (This, on the other hand, is felt relatively more frequently by firms
in Pecs.)  (Table 32)
Table 32
Advantages of competitors by location of firms (number of answers)
Town of over  Town of 20-100  Town of un-
Specification
100 thousand
thousand
der 20 thou- Village  Total
dwellers
dwellers
sand dwellers
Larger plant size
19
8
2
6
35
Efficiency of production
9
3
1
2
15
Technological innovation
8
4
4
5
21
Low overhead costs
8
0
11
3
12
Marketing and
advertising expertise
8
1
0
0
9'
Efficient channels of
distribution
9
2
0
5
16
Credit availability
4
0
2
3
9
High start up and/or
working capital
21
3
1
5
30
Quality of products
6
1
0
2
9
Low wages and salaries
6
0
0
3
9
Others
12
0
2
2
16
None
26
7
3
9
45
Total
84
20
9
27
140
From the ownership structure aspect the order and frequency of the above
answers is most characteristic in the case of business organisations founded
solely or partly by natural persons. (The other groups, partly because of the low
number of their members, demonstrate individual characteristics neither here,
nor when naming their own weakness.)  (Table 33)
Answers regarding own weakness are much less concentrated to one
factor. Besides the answer „there is no such" the most frequent is „other" (ac-
cording to the adjoining verbal explanations these are related to occasional, tern-
porary, often alleged factors, thus this category can hardly interpreted as an-
swer). A relatively more frequently mentioned perceived weakness is capital
size (apparently with opposite sign), available loans, and technological innova-
tion (which appear characteristically at entrepreneurs in Pecs and at business
organisations owned entirely or partly by natural persons)  (Table 34  and 35).
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 33
Advantages of competitors by legal forms of firms (number of answers)
Businesses
Co-o-
Businesses Businesses
Private
based ex- based on pri- based ex-
Specification
firms pew_
on
vate and elusively on Total
tires private persons legal entities legal entities
Larger plant size
1
0
26
6
2
35
Efficiency of
production
1
0
7
6
1
15
Technological
innovation
1
0
16
2
2
21
Low overhead costs
0
1
7
2
2
12
Marketing and
advertising expertise
0
0
7
1
1
9
Efficient channels of
distribution
0
0
10
5
1
16
Credit availability
2
0
5
2
0
9
High start up and/or
working capital
0
0
26
3
1
30
Quality of products
0
0
7
1
1
9
Low wages and salaries
0
0
6
2
1
9
Others
3
0
10
0
3
16
None
4
2
28
8
3
45
Total
9
3
98
20
10
140
Table 34
Weaknesses of own enterprises by location of firms (number of answers)
Town of over
Town of
Town of under
Specification
100 thou-
20-100 thou-
20 thousand
Village
Total
sand dwellers sand dwellers
dwellers
Larger plant size
12
2
1
4
19
Efficiency of production
14
3
1
1
19
Technological innovation
11
3
1
5
20
Low overhead costs
10
2
0
1
13
Marketing and
advertising expertise
10
0
2
1
13
Efficient channels of
distribution
6
1
0
3
10
Credit availability
13
3
1
4
21
High start up and/or
working capital
18
2
0
4
24
Quality of products
7
0
0
1
8
Low wages and salaries
5
1
0
2
8
Others
13
6
3
8
30
None
19
4
4
5
32
Total
84
20
9
27
140
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Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Table 35
Weaknesses of own enterprise by legal forms of firms (number of answers)
Businesses Businesses Businesses
Private
based
based exclu- based on pri- based ex-
Specification
opera- sively on pri- vate and le- clusively on
Total
firms
tives vate persons gal entities legal entities
Larger plant size
2
0
16
0
1
19
Efficiency of
production
0
1
13
4
1
19
Technological
innovation
1
0
16
2
1
20
Low overhead costs
1
0
7
3
2
13
Marketing and
advertising expertise
1
1
9
2
0
13
Efficient channels of
distribution
1
0
7
1
1
10
Credit availability
2
1
12
5
1
21
High start up and/or
working capital
1
0
18
4
1
24
Quality of products
1
0
3
2
2
8
Low wages and salaries
0
2
3
2
1
8
Others
3
1
19
5
2
30
None
3
0
22
4
3
32
Total
9
3
98
20
10
140
Considering advantages of competitors and own weakness pairwise from
the aspect of market competition, from the viewpoint of an entrepreneur the cri-
tical factors are those where both are more frequent: strength of competitor
meets weakness or own firm. According to responses such factors are efficiency
of production, plant size, technological innovation, and capital size. Besides
these, rather as own weakness, availability of loans can be mentioned. That is,
respondents believe that their market position is primarily dependent on the a-
vailability of production factors, and there is relatively lesser role of, for ex-
ample, product quality, marketing, advertising, sales channels, etc. It can be
seen again that we are only in the initial, spontaneous phase of the diffusion of
(Eastern European) entrepreneurship, which has just succeeded, often on a con-
strained track, the centralised planned (shortage) economies; and the entrepre-
neurial standards and quality demanded by a real market economy can be ob-
served rarely.
8.5 Services and financial activities
General administration as a service is supplied partly or entirely from internal
sources at the majority of the interviewed enterprises (120 from 140). This
statement is valid for all types of settlements. Half of the interviewed firms turn
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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
to an accounting and consulting firm to fulfil their obligations (from the 140
firms only 63 firms tried to find some internal solution), in this case no diffe-
rences were found with respect to plant sites either. 65 firms indicated that to
some extent they pursue their own marketing activities, an additional 13 firms
said to use external sources, thus the conclusion can be drawn that close to half
of the firms do not pursue any kind of planned marketing activity.
More than half of the enterprises in cities and villages asked for marketing
services (from internal or external sources), the figures are 46 firms from 84
firms in Pecs, 19 firms out of 27 firms located in villages, meanwhile only 9
from the 20 enterprises in towns, and 4 from the 9 firms in small towns. 102
firms use internal sources for performing commercial activities to domestic
markets and an additional 20 firms used external source. The use of internal
sources is the strongest at firms in villages, from the 27 interviewed firms 23
gave such an answer. Commercial activities related to foreign markets are done
by the firm itself at 35 enterprises, and 25 firms requested external help. Re-
garding this field from the 84 entrepreneurs in cities 24 of them solved its prob-
lem mostly within the firm and 14 firms asked for external services.
The figures for enterprises on using internal or external help in commer-
cial services are as follows: from the 20 firms in town 4 asked for internal, 3 ex-
ternal help, from the 9 firms in small town 2 for internal 3 external help, from
the 27 firms in villages 7 for internal 5 external help. To provide technical-engi-
neering services 69 enterprise looked for internal solution at least partly, and 20
firms found external solution. To some extent more than half of the enterprises
located in towns and in villages solved the technical-engineering problems from
own sources. Financial services are provided from internal sources at most of
the interviewed firms (103 firms from the 140 enterprises included in the stu-
dy), 27 firms looked for external solution. This statement is not true for the en-
terprises with plant site in small towns, since from the 9 interviewed firms only
4 indicated internal solution. 43 enterprises provided their own security-guard
service, 13 firms turned to other organisations. It is the most frequently request-
ed service by the enterprises in villages, 14 firms from the 27 indicated and 11
enterprises provided it within the firm.
All individual and co-operative enterprises provide more than 50% of the
general administration by themselves. 87.5-95.2% of the enterprises founded
solely by natural or legal persons, founded by both natural and legal persons act
similarly. Accounting and tax consulting were provided from internal sources at
4 individual, 2 co-operative enterprises, 40 enterprises founded solely by natural
persons, 13 enterprises founded by both natural and legal persons, and 4 enter-
prises founded solely by legal persons. Within that more than half of this type of
service was given from internal sources by 25% of the individual enterprises,
160

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
100% of the co-operative enterprises, 82.5% of the enterprises founded solely
by natural persons, 76.9% of the enterprises founded by both natural and legal
persons, and all the enterprises founded solely by legal persons.
Marketing services are partly performed from internal supply by 5 indivi-
dual, 1 co-operative enterprises, 44 enterprises founded solely by natural per-
sons, 13 enterprises founded by both natural and legal persons, 2 enterprises
founded solely by legal persons. Within that 100% of the individual, co-opera-
tive enterprises and enterprises founded solely by legal persons, 88.6% of the
enterprises founded solely by natural persons, and 92.3% of the enterprises
founded by both natural and legal persons provide marketing services from in-
ternal sources.
Sales activities for domestic markets are provided partly from internal
sources by 8 individual and 2 co-operative firms, 78 enterprises founded solely
by natural persons, 11 enterprises founded by both natural and legal persons and
3 enterprises founded solely by legal persons. Within this 100% of the indivi-
dual and co-operative firms, and the enterprises founded by both natural and
legal persons and enterprises founded solely by legal persons also 97.4% of the
enterprises founded solely by natural persons relied on internal source to more
than 50% in performing sales activities for domestic markets.
Sales for foreign markets are accomplished partly from external source by
2 individual enterprise, 26 enterprises founded solely by natural persons, 7 en-
terprises founded by both natural and legal persons, 2 enterprises founded solely
by legal persons. Among them 50% of the individual enterprises, 73.1% of the
enterprises founded solely by natural persons, 71.4% of the enterprises founded
by both natural and legal persons, and 100% of the enterprises founded solely
by legal persons relied on external source to more than 50% regarding foreign
markets' sales.
4 individual enterprises, 1 co-operative firm, 52 enterprises founded sole-
ly by natural persons, 8 enterprises founded by both natural and legal persons, 4
enterprises founded solely by legal persons tried to find internal solution for
providing technical-engineering services. Among them 100% of the individual
and the co-operative enterprises, 87.5% of the enterprises founded by both na-
tural and legal persons, 88.5% of the enterprises founded solely by natural per-
sons relied on internal solution to more than 50% in solving technical-engineer-
ing problems.
Financial services were provided from internal sources at 8 individual and
3 co-operative enterprises, 73 enterprises founded solely by natural persons, 13
enterprises founded by both natural and legal persons, 6 enterprises founded so-
lely by legal persons. The share of internal sources used to provide financial ser-
vices was more than 50% at 100% of the co-operative firms, and the enterprises
161

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of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
founded solely by legal persons, 94.5% of the enterprises founded solely by na-
tural persons, 92.3% of the enterprises founded by both natural and legal per-
sons, 87.5% of the individual enterprises.
2 individual and 2 co-operative firms, 31 enterprises founded solely by
natural persons, 4 enterprises founded by both natural and legal persons and 4
enterprises founded solely by legal persons relied partly on internal sources in
providing security-guarding services. Among them all the individual and co-
operative firms, also the enterprises founded solely by legal persons, and 90.3%
of the enterprises founded solely by natural persons, and 75% of the enterprises
founded by both natural and legal persons supplied more than half of the needed
security-guarding services from internal sources.
8 individual enterprises, 64 enterprises founded solely by natural persons
and 11 enterprises founded by both natural and legal persons turned to an ac-
counting and tax consulting firm. From them 62.5% of the individual enter-
prises, 98.4% of the enterprises founded solely by natural persons, 81.8% of the
enterprises founded by both natural and legal persons relied on external sources
in providing this type of services.
With respect to other types of services the use of external sources is not
significant at any form of the enterprises.
80% (109 firms) of the interviewed enterprises do not pursue advertising
activities, the figures of advertising expenditures given in the percentage of the
firm's turnover are as follows: 7.1% (10 firms) of the firms spent less than
0.5%, 6.4% (9 firms) spent 0.5-0.9%, 5.7% (8 firms) spent 1.0-4.9%, 1.4% (2
firms) spent 5.0-9.9% and an additional 1.4% spent more than 10%. Doing ad-
vertising activity mostly characterises firms operating in Pecs, 28.6% of them
spent at least 0,5% of its turnover on this, while only 3.7% of the enterprises in
villages had similar attitude. Without an exception all firms spending more than
1% of its turnover on advertising are located in city.
The proportion of firms spending money on advertising is the highest a-
mong individual enterprises, 33.3% that is 3 firms, it is the lowest among co-
operative firms, 0%. 23.5% of the enterprises founded solely by natural persons,
23.5% of the enterprises founded by both natural and legal persons and 10% of
the enterprises founded solely by legal persons spent on advertising.
22.2% (2 firms) of the individual enterprises spent 0.5-1% of their turn-
over on advertising, and 11.1% (1 firm) spent 1-5% of its turnover.
Regarding enterprises founded solely by natural persons 8.2% (8 firms)
spent 0.5% of its turnover on advertising, 5.1% (5 firms) of them spent 0.5-1%
of their turnover, 6.1% spent 1-5% of its turnover, 2% spent 5-10% of its turn-
over and an additional 2% spent more than 10% of its turnover on advertising.
5% (1 firm) of the enterprises founded by both natural and legal persons
spent less than 0.5% of its turnover and an additional 2 firms that is 10%, spent
1-5% of its turnover on advertising.
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Discussion Papers, No. 19.
Only one enterprise founded solely by legal persons spent money on ad-
vertising that amounted to less than 0.5% of its turnover.
Based on the study the most popular channels of advertising are the local
newspapers, 18.6% (26 firms) chose it. For the enterprises in towns, small
towns and villages this means almost the only channel of advertising while the
use of the combination of different types of advertising techniques is typical of
firms in cities (Table 36).
Table 36
The most popular channels of advertising (number of answers)
Businesses
Businesses
Businesses
Co-op era-
Private
Specification
ti.
based exclu-
based on
based exclu-
ve also-
Total
firms
sively on pri- private and sively on le-
ciations vate persons legal entities gal entities
Local newspapers
2
0
22
3
0
27
National newspapers,
magazines
0
0
3
0
0
3
Radio, television
1
0
3
0
0
4
Play-bills, handbills
1
0
1
0
0
2
Advertising brochures
0
0
3
1
0
4
Others
0
0
4
0
1
5
The most favoured advertising technique by all forms of ventures are the
local newspapers. 25-50 of the advertising activities are carried through this
channel by 11.1% of the individual entrepreneurs, and 11.1% uses this channel
for 50-100% of the advertising. 16.5% of the enterprises founded solely by na-
tural persons, and 15% of the enterprises founded by both natural and legal per-
sons use this channel to 50-100%.
3.1% (3 firms) of the enterprises founded solely by legal persons put
25-50% of their advertisement in national newspapers and magazines.
11.1% of the individual enterprises and 3% of the enterprises founded
solely by natural persons use television and radio to reach their advertising
objectives.
22.2% of the interviewed individual enterprises and 3% of the enterprises
founded solely by natural persons use play-bills and handbills for advertising
their activities. Only 5% of the enterprises founded solely by natural persons
and 5% of the enterprises founded by both natural and legal persons used ad-
vertising brochures as tools of advertising.
Last year only 34.3% (48 firms) of the interviewed enterprises were
profitable. The largest proportion of enterprises earning profit was located in
163

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Pecs: 36.9% that is 31 firms, it was the smallest of firms located in villages with
its 29.6% (8 firms). The figures for enterprises in towns and in small towns, 30
and 33.3% respectively, represented the middle value. Last year 44.4% (4
firms) of the individual enterprises, 66.7% (2 firms) of the co-operative firms,
30.6% (30 firms) of the enterprises founded solely by natural persons, 40%
of the enterprises founded by both natural and legal persons, and 40% of the
enterprises founded solely by legal persons were profitable.
Regarding the interviewed enterprises the data on profits given in the per-
centage of the total assets show that the profit was less than 5% at 4.3% of the
firms, 6-10% at 6.4% of them, 11-30% at 7.9%, 31-50% at 2.1%, 51-100% at
2.9% and it exceeded the total value of the total assets at 2.1% that is 3 firms.
Only firms in Pecs and villages can take pride in having a profit exceeding 50%
of total assets. However, while 3.6% of the firms in cities earned profit that is
51-100% of total assets, 3.7% of the firms with village location had similar po-
sition. Last year a profit exceeding the value of the total assets was earned by
1.2% of enterprises in cities that is 1 firm, and by 7.4% of enterprises in vil-
lages that is 2 firms  (Table 37).
Table 37
The proportion of profit in total assets in the last year (%)
Businesses
Businesses
Co-opera
Businesses
Proportion of profit  Private
•
based exclu-
based on
firms
based exclu-
tive ass _
o-
.
in total assets
swely on pri-
Total
private and  sively on le-
ciations
vate persons
legal entities  gal entities
Zero
55.6
33.3
69.3
60.0
70.0
66.4
Under 5%
0.0
66.7
4.1
0.0
0.0
4.3
5-10%
11.1
0.0
4.1
10.0
20.0
6.4
11-30%
11.1
0.0
6.1
15.0
10.0
7.9
31-50%
0.0
0.0
3.1
0.0
0.0
2.1
51-100%
11.1
0.0
3.1
0.0
0.0
2.9
Over 100%
0.0
0.0
1.0
10.0
0.0
2.1
No answer
11.1
0.0
9.2
5.0
0.0
7.9
Total
100.0
100.0
100.0
100.0
100.0
100.0
The proportion of profit in total assets was 6-10% at 11.1% of the indivi-
dual enterprises, 11-30% and 51-100% at the same number of firms in each
case. The profit of the 66.7% (2 firms) of the co-operative enterprises did not
reach 5% of the total assets.
Regarding enterprises founded solely by natural persons the profit was
less than 5% of the total assets at 4.1% of them, and it amounted to 6-10% at
the 4.1% of them, it reached 11-30% at 6.1% of the firms, 31-50% and
164

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
51-100% at 3.1% of the firms in each case, it exceeded the total assets at 1%,
and 9.2% that is 9 firms did not give any information on their profit. The profit
was 6-10% of the total assets at 10% of the enterprises founded by both natural
and legal persons, it was equal to the 100% of the total assets at 10% of them,
and it amounted to  11-30%  at 15% of them. The profit was 6-10% of the total
assets at 20% of the enterprises founded solely by legal persons, and it equalled
to 11-30% of the total assets at 10% of the firms.
86.4% of the interviewed enterprises found difficulties in borrowing fi-
nancial resources because of the too high own share in the existing credit con-
structions. 85.7% (72 firms) of the enterprises in cities, 95% (19 firms) of enter-
prises in towns, 88.9% (8 firms) in small towns, 81.5% (22 firms) in villages
were of the same opinion. 50.7% of the interviewed considered high interest
rate as one of the hampering factor in obtaining loans. 53.6% of the entrepre-
neurs in Pecs, 45% of them in towns, 44.4% in small towns, and 48.1% in vil-
lages stated the same. Too heavy collateral securities were seen by 55.7% of the
interviewed entrepreneurs as a factor that makes it difficult to obtain loans. Si-
milar opinion was expressed by 57.1% of the firms in Pecs, 80% in towns,
44.4% in small towns, and 37% in villages. As a result of internal financing
8.3% of the entrepreneurs in Pecs, 5% in towns, 22.2% in small towns, and
14,8% in villages faced no difficulties in obtaining financial resources  (Table
38).
Table 38
Types of difficulties in borrowing financial resources (number of answers)
Co-ape-  Businesses
Businesses
Businesses
Private  rative  based exclu-  based on pi-  based exclu-
Types of difficulties
Total
firms
asso-
sively on pri-  vate and le--  sively on le-
ciations vate persons
gal entities
gal entities
Too high own share in e-
xisting credit constructions
1
1
13
2
2
19
High interest rates
7
2
47
11
2
69
Too heavy collateral
securities
2
3
43
10
4
62
No difficulties as a result
of internal financing
1
0
23
3
2
29
No difficulties
as other reasons
0
0
8
2
4
14
Total
11
6
134
28
14
193
11.1% of the individual enterprises, 33.3% of the co-operative firms,
13.3% of the enterprises founded solely by natural persons, 10% of the enter-
prises founded by both natural and legal persons, 20% of the enterprises found-
165

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
ed solely by legal persons considered the too high own share in the existing cre-
dit constructions as a hampering factor in obtaining loans. High interest rates are
seen by 77.8% of the individual firms, 66.7% of the co-operative firms, 48% of
the enterprises founded solely by natural persons, 55% of the enterprises found-
ed by both natural and legal persons, and 20% of the enterprises founded solely
by legal persons as an obstruction in getting loans. The heavy burden of collat-
eral security makes it difficult to borrow money according to 22% of the inter-
viewed individual enterprises, 100% of the co-operative enterprises, 43.9% of
the enterprises founded solely by natural persons, 50% of the enterprises found-
ed by both natural and legal persons, and 40% of the enterprises founded solely
by legal persons.
Because of internal financing the acquisition of financial means does not
cause any problem to 11% of the individual enterprises, 23.5% of the enter-
prises founded solely by natural persons, 15% of the enterprises founded by
both natural and legal persons, and 20% of the enterprises founded solely by
legal persons.
32.9% (46 firms) of the interviewed enterprises had no business relation-
ship with banks, 50% had with 1 bank, 10.7% (15 firms) with 2 banks, 6.4%
with more than 2 banks. 36.9% of the firms in city do not have any contact with
bank.,  45.2% with 1 bank, 11.9% with 2 banks, and 6% with more banks. 10%
of the firms worked with 2 banks, 60% with 1 bank and 30% had no business
relationship with any bank.
11.1% of the individual firms have no contact with banks, and 88.9% of
them have contact with only 1 bank  (Table 39).
Table 39
Business relationship with banks (%)
Co-ope-
Businesses
Businesses Businesses
Number of banks.
Private rative
based exclu- based on pri- based exclu-
related to the
Total
firms
asso-
sively on pri- vate and le- sively on le-
enterprise
ciations  vate persons
gal entities gal entities
Zero
11.1
0.0
31.6
50.0
40.0
32.9
One bank
88.9
66.7
51.0
35.0
30.0
50.0
Two banks
0.0
33.3
11.2
10.0
10.0
10.7
More banks
0.0
0.0
6.2
5.0
20.0
6.4
Total
100.0
100.0
100.0
100.0
100.0
100.0
66.7% of the co-operative enterprises have contact with 1 bank and
33.3% of them has contact with 2 banks. 31.6% (31 firms) of the enterprises
founded solely by natural persons have no contact with banks, 51% (50 firms)
166

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
operates with 1 bank, 11.2% of them with 2 banks, and 6.1% with more than 2
banks. Half of the enterprises founded by both natural and legal persons have no
contacts with banks, 35% (7 firms) has a business relation with 1 bank, 10%
works with 2 banks, and 5% works with more financial institutions. 40% of the
enterprises founded solely by legal persons do not have a business relation with
banks, 30% (3 firms) works with 1 bank, 10% works with 2 banks and 20%
works with more than 2 banks.
The only individual enterprise without any contact with banks finds the
needed financial means from internal sources. For the 31 enterprises founded
solely by natural persons the needed financial means are provided by the suppli-
ers for 12.9% (4 firms) of them, by the consumers for 22.2% (7 firms), and by
the firms themselves through internal financing in the case of 71% (22 firms) of
them. For the 10 enterprises founded by both natural and legal persons without
any contact with banks the financial means are guaranteed by the suppliers for 1
firm, by the consumers for 5 firms, from internal financial sources at 4 firms.
Those 4 enterprises founded solely by legal persons not working with
banks find the needed amount of financial means through the firms' internal fi
nancing. The proportion of enterprises not having debts is the highest, 75% (15
firms) among enterprises located in towns, the debts mounted to 25-50% of the
total assets at 15% of the firms, and the debts exceeded the total assets at 5% of
the firms.
Till this year only 22.2% (2 firms) of the enterprises in small towns have
not asked for a loan, 33.3% of the firms had debts mounted up to 1-25% of
total assets, at another 33.3% this figure was 25-50% and it was 50-75% at
11.1% of the firms  (Table 40).
Table 40
Proportion of total debts on total assets (%)
Businesses
Businesses
Businesses
Co-oPe-
Private
based exclu-
based on
based exclu-
Proportion
rative asso-
Total
firms
sively on pri-  private and  sively on le-
ciations
vate persons  legal entities  gal entities
None
44.5
66.7
65.3
80.0
60.0
65.7
Under 25%
33.3
0.0
5.1
5.0
30.0
8.5
25-50%
11.1
33.3
16.3
5.0
10.0
14.3
51-75%
11.1
0.0
3.1
0.0
0.0
2.9
76-100%
0.0
0.0
3.1
5.0
0.0
2.9
Over 100%
0.0
0.0
5.1
5.0
0.0
4.3
No answer
0.0
0.0
2.0
0.0
0.0
1.4
Total
100.0
100.0
100.0
100.0
100.0
100.0
167

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Among the enterprises located in villages the proportion of firms not
having debts is high: 63% (17 firms). The debts of 18.5% (5 firms) of the
firms are equal in value to 25-50% of their total assets, and total debts are
greater than the value of total assets at 7.4% of the firms.
Last year 44.4% of the individual enterprises did not have any debt, the
debt did not reach the quarter of the total assets at 33.3% (3 firms) of them, the
total debt was 25-50% of the total assets at 11.1% of the firms, and 50-75% at
the same number of firms. 66.7% of the co-operative enterprises did not have
debts, the debt of 33.3% (1 firm) equalled to 25-50% of its total assets.
65.3% of the enterprises founded solely by natural persons did not have
debts, total debt was less than the quarter of the total assets at 5.1% (5 firms) of
them, it was 25-50% of the total assets at 16.3% of the firms, it amounted to
50-70% of the total assets at 3.1% of them, and to 75-100% at the same
number of firms. Total debt surpassed the value of the total assets at 5.1% (5
firms) of the enterprises.
Last year 16 (80%) enterprises founded by both natural and legal persons
did not have debt, the debt amounted to 0-25%, to 25-50%, to 75-100% of the
total assets and it exceeded the total assets at 5% of the firms, respectively. Last
year 60% (6 firms) of the enterprises founded solely by legal persons did not
have any debt, the total debt did not exceed the quarter of the total assets at 30%
of the firms, and it amounted to 25-50% of the total assets at 10% of the firms.
Last year 80.7% (113) of the interviewed enterprises did not have any
short-term debt. The share of short-term debts surpassed the 75% of total debts
at 23 firms that is 16.4% of the interviewed (Table 41).
Table 41
Proportion of short term debts on total debts (%)
Businesses
Businesses Businesses
Private Co-ope-
based exclu-
based on based exclu-
Proportion
rative asso-
firms
sively on pri- private and sively on le-
Total
ciations
vate persons legal entities gal persons
None
55.6
66.7
83.7
85.0
70.0
80.7
Under 25%
0.0
0.0
1.0
0.0
0.0
0.7
25-50%
0.0
33.3
1.0
0.0
0.0
1.5
51-75%
0.0
0.0
1.0
0.0
0.0
0.7
Over 75%
44.4
0.0
13.3
15.0
30.0
16.4
Total
100.0
100.0
100.0
100.0
100.0
100.0
Last year 83.3% (70 firms) did not have short-term debts, while the value
of short-term debts exceeded the 75% of the total debts at 13.1% of them. From
the enterprises located in towns 90% (18 firms) did not obtain short-term loans
and the short-term debts mounted to more than 75% of the total debts at 10% of
the firms. Regarding enterprises in small towns 33.3% of them have no short-
term debts, but the share of short-term debts at 66.7% (6 firms) of the firms ex-
168

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
ceeded the 75% of the total debts. 81.5% (22 firms) of the enterprises in villages
did not ask for short-term loans. The share of short-term debts in total debts sur-
passed 75% at 14.8% of the firms.
Last year 55.6% of the individual enterprises did not have short-term
debt, while the share of this type of debt in the total debt was more than 75% at
44.4% of them. 66.7% (2 firms) of the co-operative enterprises did not have
debts, short-term debt of the 33.3% of them amounted to 25-50% of the total
debt. Last year 83.7% (82 firms) of the enterprises founded solely by natural
persons did not have short-term debt, while the share of short-term debt was
0-25%, 25-50% 50-75% in the total debt at 1% of the firms, respectively. It
exceeded 75% at 13.3% of the firms. 85% of the enterprises founded by both
natural and legal persons were not burdened with short-term debts, while the
share of short-term debt surpassed three-quarter of the total debt at 15% (15
firms) of them. 70% of the enterprises founded by solely legal persons did not
have any short-term debt, while the share of short-term debt exceeded three-
quarter of the total debt at 30% of them.
Besides cash and current bank account from the interviewed enterprises
11 (7.9%) had other financial means, too. 11.9% (10 firms) of the firms in Pecs,
5% (1%) of the firms in town and no enterprise in small town or village be-
longed to that group.
From the 10 firms in Pecs 4 marked bank deposits, 2 marked shares,
and 4 marked foreign financial assets, though in most cases their share in to-
tal assets was not specified. The single firm in town having other financial
assets than cash and current account owns bank deposits that amount to less
than 5% of its total assets.
Among the interviewed individual and co-operative enterprises no one
has other financial means than cash and current bank account 7.1% (7 firms) of
the enterprises founded solely by natural persons, 10% (2 firms) of the enter-
prises founded by both natural and legal persons, 20% (2 firms) of the enter-
prises founded solely by legal persons have at their disposal other financial
means, too.
From the 7 enterprises founded solely by natural persons 4 have bank de-
posits, 2 have shares and 1 has foreign financial means. From the above men-
tioned 2 enterprises founded by both natural and legal persons 1 has bank depo-
sit, and the other has foreign financial means. Both enterprises founded solely
by legal persons marked foreign financial means as other financial means.
8.6 Perspectives, constraints and actions
No strong relation can be shown between the location distribution of the enter-
prises and the expectations regarding future turnover. The interviewed enter-
prises had similar pessimistic view on the future perspective of turnover
169

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
whether it was in large, medium-size or small town. The 70% of the 140 inter-
viewed enterprises expected slow growth or a turnover remaining at the same
level. Fast growth was predicted in smaller towns and villages, 11.1% of the
enterprises in small towns and 14.8% of them in villages expected a fast
growth of turnover. In larger towns 8.3% of the enterprises and 5% of the
enterprises in medium-size towns expected fast growth. Seven firms ren-
dered the termination of their activities probable, 1 was operating in a large
town, 2 in medium-size towns, 1 in smaller town and 3 in villages. Three of
the enterprises operating in large towns thought probable not to survive if
the present situation was to be maintained (Table 42).
Table 42
Expectations regarding future turnover (%)
Co-o pe-
Businesses Businesses Businesses
Private
Specification
rative asso- based exclu- based on pri- based exclu-
firms sively on pri- vate and le- sively on le-
Total
ciations
vate persons gal entities gal persons
Fast growth
11.1
0.0
11.2
0.0
10.0
9.3
Slow growth
55.6
0.0
42.8
60.0
30.0
44.3
Remaining at
the same level
11.1
100.0
24.5
20.0
40.0
25.7
Slow down but
survive
22.2
0.0
8.2
10.0
10.0
9.3
Not to survive
0.0
0.0
10.2
10.0
10.0
9.3
No answer
0.0
0.0
3.1
0.0
0.0
2.1
Total
100.0
100.0
100.0
100.0
100.0
100.0
The interviewed 140 enterprises characteristically predicted a slowly
growing or stagnating turnover without any distinction as to ownership. 70% of
the firms are expecting it. Among the individual entrepreneurs 55% predicted
slow growth, 22.2% counted with a decrease and 11.1% expected a turnover re-
maining at the same level in the future. Only 11.1% of the individual entrepre-
neurs think that there is a likelihood of a fast growth. In this circle no one plans
to close down. The three interviewed co-operatives do not expect any changes.
From the 98 ventures formed by natural persons 42.9% expects a slow
growth of turnover, 24.5% to remain at the same level, and 11.2% a fast
growth. In this circle of owners 13% said to close down if the current conditions
were going to remain unchanged. The 20 business associations formed by na-
tural and legal persons 12 firms predicted a slowly growing turnover, 4 firms
stagnation, and 2 a decreasing turnover, also 2 firms counted with termination.
From the 10 ventures formed solely by legal persons 3 expected slow growth, 4
predicted the turnover to remain at the same level, and only 1 hoped for a fast
growth. One of them thought it possible to close down the firm.
170

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
32% of the enterprises of which 73.9% was operating in larger towns saw
insufficient demand for existing products as one of the constraints for the
growth of the company. Insufficient demand was not typically considered as a
constraint for the growth of the company in smaller towns or villages. Lack of
skilled work force as a constraint was seen only by 7 from the 84 companies o-
perating in large towns, 2 from 20 companies in medium-size towns, 2 from 9
companies in smaller towns and 3 from 27 enterprises operating in villages. Re-
strictions on the supply of raw material and intermediate goods were not consi-
dered as constraints by companies operating in smaller towns, and it was not
seen a typical constraint in the other settlements either. The most emphasised
constraint was the lack of financial means for expansion. Among the 46 enter-
prises marking the lack of financial means 63% are operating in large towns,
8.7% are operating in both medium-size and small towns, and 19.6% in vil-
lages. From the companies operating in the four different types of settlements
only two companies in large towns mentioned a lack of managerial and organi-
sational capability. The excessive legal and administrative restrictions were not
considered constraint for economic growth by enterprises in medium-size and
small towns, and from the 27 enterprises in villages only 1, and from the 84 in
large towns 12 thought it hampers growth  (Table 43).
Table 43
Main barriers of enterprise development (number of answers)
Co-ope-  Businesses
Businesses
Businesses
Private  rative  based exclu-
based on
based exclu-
Specification
firms  associa- sively on pri-  private and
sively on le-  Total
tions
vate persons  legal entities
gal entities
Insufficient demand
for products
5
0
31
5
5
46
Lack of skilled
work force
1
0
9
4
0
14
Restrictions on the supp-
ly of raw material and
intermediate goods
0
0
7
2
0
9
Lack of financial means
1
1
35
7
2
46
Lack of managerial and
organisational capability
0
0
2
0
0
2
Excessive legal and ad-
ministrative restrictions
3
0
9
0
1
13
Excessive indebtedness
0
0
2
3
0
5
Insufficient factory
space
3
1
12
1
0
17
Insufficient capacity
of machinery
0
2
14
4
1
21
None
1
0
6
1
1
9
Other hampering factors
1
1
18
4
4
28
Total
15
5
145
31
14
210
171

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Excessive indebtedness was considered as a constraint for growth only by
the companies in large town and 1 company in each of the other two settle-
ment& Insufficient factory space was a typical constraint for companies — total
17 companies — in large towns and in villages. Among them 11 were operating
in large towns, 4 in villages and 1 in both medium-size town and small town.
Insufficient capacity of machinery as constraint was marked by 21 enterprises,
47.6% of them pursued business in large towns, and 28.6% in villages.
From the interviewed 140 enterprises 9 saw no constraints for growth.
Other hampering factors were given by 20% of the enterprises most of them
operating in small towns or villages.
Based on ownership structure the companies gave partly similar and part-
ly different reasons that caused to hamper the growth of the firm. With the ex-
ception of the co-operatives, the other forms saw insufficient demand, lack of
financial means, insufficient capacity of machinery, and insufficient factory
space as constraints for growth.
For the three co-operatives the main constraints were rather the capacity
of machinery and the insufficient factory space. They also mentioned the lack of
financial sources. Among the individual entrepreneurs 55.6% saw the main
constraint in insufficient demand, 33% found the operating factory space insuf-
ficient, and 11% had problems with the lack of financial means, also 11%
thought that there was no limitation to their growth.
With respect to individual entrepreneurs indebtedness, lack of managerial
capability, difficulty in recruiting skilled employees were not counted as ham-
pering factors.
From the 98 enterprises, formed solely by natural persons 35.7% consi-
dered the insufficient financial means, 31% the insufficient demand, 14.3% in-
sufficient capacity of machinery, 12.2% insufficient factory space as constraints
for growth. Since two answers had to be given for the question it is probably
that if lack of financial resources was a constraint for the company, capacity of
machinery and insufficient demand were also hampering the firm's growth.
From the 20 ventures formed by both natural and legal persons lack of fi-
nancial means represented a constraint for 7 enterprises, and 5 enterprises mark-
ed insufficient demand and insufficient factory space as constraints. 4 Enter-
prises also mentioned insufficient capacity of machinery as a hampering factor.
5 companies saw a constraint for growth in other conditions. This circle of en-
trepreneurs does not see the lack of managerial capability, and the legal admi-
nistrative restrictions as encumbering factors.
From the 10 business associations formed solely by legal persons 5 consi-
dered insufficient demand, 2 lack of financial means, 1 capacity of machinery, 1
legal restrictions as the barrier of development.
172

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
Next we will analyse what the relation is between the measurements plan-
ned to be taken in the future for improving efficiency and the settlement distri-
bution of enterprises. 38.6% of the enterprises considered important to improve
the efficiency of production. The importance of taking those measurements was
more emphasised in small towns than villages. Similar importance as to the
others was given to improve efficiency in large and medium-size towns. A simi-
lar importance was attached to introducing technological innovation, 27.1% of
the companies found it necessary. 55.6% of the enterprises in small towns,
though only 14.8% of them in villages are planning to introduce ones. In order
to improve the firm's performance 16.4% of the enterprises plan to reduce the
overhead costs, mostly in medium-size and small towns. To improve perfor-
mance by this method bears no significance with respect to large towns or vil-
lages (Table 44).
Table 44
Measurements planned to be taken in the future for improving
efficiency of enterprises (number of answers)
Co-ope-
Businesses
Businesses
Businesses
Private
rative
based exclu- based on pri- based exclu-
Measurements
Total
firms
associ-
sively on pri- vate and le- sively on le-
ations
vate persons
gal entities
gal entities
Improve the effici-
ency of production
6
0
37
10
1
54
Introducing techno-
logical innovations
5
1
25
5
2
38
Reducing the
overhead costs
1
1
18
2
1
23
Increasing advertising
expenditures
3
0
13
2
0
18
Improving the chan-
nels of distributions
1
0
11
1
1
14
Obtain short-term credit
0
1
4
2
0
7
Obtain long-term credit
1
0
13
2
0
16
Increasing their equity
0
0
1
2
0
3
Reduction of
indebtedness
1
0
6
1
1
9
Improving the quality
of products
3
0
17
4
1
25
Reducing the wages
0
0
0
0
0
0
Reducing employment
1
0
2
1
0
4
Other
0
1
24
5
5
35
None
1
1
19
3
3
27
Total
23
5
190
40
15
273
173

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
To  increase advertising expenditures is planned by 12.9% of the firms.
Advertising activity is seen important in large and small towns, though it is
thought not to be playing an important role in villages.
10% of the companies plan to improve the channels of distribution. Com-
panies in medium-size towns saw it particularly important in improving perfor-
mance. 25% of those companies plan to pursue such an activity, while compa-
nies in large towns or villages do not attach any particular importance to it.
5% of the interviewed firms want to improve its performance by obtain-
ing short-term credit. Despite the fact that the enterprises' supply of working ca-
pital is insufficient only 1-2 firms plan to obtain short-term credits in all types
of settlements. Also only 11.4% of the enterprises plan to obtain medium or
long-term loans.
The intention to draw in long-term credits is on the average in large
towns, but it is not characteristic for medium-size towns. Regarding small towns
22.2% and with respect to villages 14.8% of the interviewed companies plan to
obtain such a long-term credit.
From the 140 enterprises only 3 plan to increase their equity,  1  is operating
in a large town, and 2 in villages. Similarly only a few consider the reduction of
indebtedness as a mean to improve performance. Only 4.4% of the interviewed
enterprises plan to pay off their debts in the near future, mostly in medium-size
and small towns. There is no intention to do so in villages. 17.9% of the inter-
viewed enterprises plan to improve the quality of products. Among the  firms
operating in villages only 1 wants to increase performance by it, while in small-
er town 33.3%, in large towns 20.2%, in medium-size towns 20.0% of the com-
panies want to do so.
No reduction of wages or salaries is planned in any of the settlements.
The intention to reduce employment appears only in a few cases, no one wants
to use it in medium-size towns, and only 1 of the firms in each of the other set-
tlements.
At 19.3% of the enterprises want to do nothing in order to improve per-
formance. Almost one-third of them are pursuing business in villages.
To improve the firm's performance the enterprises plan to take similar
and different action. Since there was no limitation how many answers could be
chosen from the 14 possible answers, the enterprises are characterised by the
followings according to their ownership structure. From the 9 individual entre-
preneurs 5 plan to improve the efficiency of the production, 3 to increase adver-
tising expenditures to improve their performance, and 3 want to improve the
quality of the products. 1 entrepreneur for each case thought that reducing em-
ployment and overhead costs might improve performance. 1 entrepreneur wants
to obtain credit and the other wants to pay off his debts. No one plans to reduce
wages or salaries or to increase its equity.
174

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
From the co-operatives 1 wants to introduce technological innovation, 1
wants to reduce overhead costs, and 1 plans to apply for short-term credit
37.8% of the ventures of natural persons believed that improving the efficiency
of production were the source of growth, others believed in something else,
25.5% in technological innovation, 18.8% in reducing costs and expenditures,
17.3% in improving the quality of products, 13.3% in increasing advertising ex-
penditures. Some of the enterprises wanted to improve performance by obtain-
ing credit, increasing equity, or reducing debts.
From the interviewed 20 ventures of natural and legal persons — similarly
to the order of the previous one — 10 plan to enhance performance by improving
efficiency, 5 by innovation, 2 by reducing costs, 2 by increasing advertising ex-
penditures. 2 companies want to increase their equity to enhance performance.
From the interviewed 10 ventures formed solely by legal persons 1 plans
to improve the efficiency of production, 2 to introduce innovation, 1 in each
case to improve the channels of distribution, to reduce debts and costs. There
were 5 companies who saw other possibilities to improve performance, while 3
companies did not want to do any changes.
During the last five years 36.4% of the enterprises were not aware of the
existence of enterprise supporting scheme provided by the government or local
government. Half of the enterprises in villages, and more than 40% of them in
medium-size and small towns lacked information on such an industrial policy
program or subsidies. 19.3% of the interviewed enterprises gained support for
starting the venture. The ratio is only 14.8% regarding villages, it is average in
large towns, and with respect to the other settlements more than 20% of the en-
terprises have got some kind of support.
36% of the interviewed 140 enterprises did not know about any govern-
mental or local entrepreneurship supporting schemes during the last five years.
Half of the enterprises with legal persons participation, one-third of the enter-
prises of natural persons and also the individual entrepreneurs did not have in-
formation on it. All the co-operatives had that information (Table 45).
Table 45
SMEs awareness of support from the government and local authorities
Businesses Businesses Businesses
Co-opera-
Private
asso_ b ased exclu- based on pri- based exclu-
Specification
five
firms sively on pri- vate and le- sively on le- Total
ciations vate persons gal entities gal entities
Number of companies
know about supports
6
3
64
11
5
89
Percentage of companies
know about supports
66.7
100.0
65.3
55.0
50.0
63.6
175

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
The entrepreneurs attached importance to efficient governmental inter-
vention in order to develop private entrepreneurship. 66.4% of the interviewed
enterprises saw reduction of interest rates as a mean for it. All companies with-
out an exception as to settlement found it important. The reduction of interest
rates was considered important by 75% of enterprises in medium-size towns,
70.4% in villages, and even in large and small towns the proportion expecting
efficient help from governmental interventions was above 60%. Liberalising the
banking system was seen as a supportive central measurement by 13.6% of the
enterprises. It is not important for those operating in villages, but 33.3% of the
interviewed in small towns saw its significance. From the enterprises in large
and medium-size towns only a few sees liberalisation of banking system as a
tool to help to enhance private entrepreneurship. Infrastructure investments are
considered much more needed (Table 46).
Table 46
The hierarchy of importance of governmental interventions in order to
develop private entrepreneurship (number of answers)
Co-ope- Businesses Businesses Businesses
Government's
Private rative based exclu- based on pri- based exclu- Total
interventions
firms associa- sively on pri- vate and le- sively on le-
tions vate persons gal entities
gal entities
Reduction of interest rates
5
3
66
14
5
93
Liberalising the banking
system
2
1
13
2
1
19
Infrastructure development
2
1
19
1
1
24
Reducing inflation
6
1
34
8
3
52
Simplifications of proce-
dure of setting up a
1
1
7
3
1
13
company
Application of a tax system
based on preferences
4
2
65
11
6
88
Protection of domestic
market
1
0
12
4
1
18
Other
1
0
18
2
5
26
None
0
0
1
1
0
2
Total
22
9
235
46
23
335
17.1% of the enterprises feel its importance, among them 20.2% in large
towns, 18.5% in villages. 37.1% of the firms (46.5% in large towns, 35% in
medium-size towns) thought that central interventions should reduce inflation.
Only a few entrepreneurs operating in the other types of settlements thought that
slowing down inflation is a tool for fostering private entrepreneurship. 9.3% of
the interviewed companies see the simplification of the procedure for establish-
176

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
ing and running a private enterprise an opportunity for supporting entrepreneur-
ship. Firms operating in villages (22.2%) were thinking that way. Only a couple
of companies operating in other types of settlements mentioned it. The appli-
cation of a tax system based on preferences was considered as an efficient tool
for support by 62.9% of the companies. The firms in all settlements found tax
allowances necessary (77.8% of the interviewed in small towns, 64.3% in large
towns). 12.9% of the companies agree that the protection of domestic market is
a form of support. Mostly companies operating in large towns and villages felt
it important 18.6% of the enterprises thought that other interventions could be
efficient in fostering private entrepreneurship.
More than one answer was possible to give when answering the question
of what kind of governmental interventions would be necessary. According to
the answers there are no inevitable differences between priorities for govern-
mental interventions based on ownership structure. Reducing interest rates was
on the first place for all forms of ownership. The importance of it was empha-
sised at least by half of the enterprises with no respect as to ownership structure
and by co-operatives without exception. Similarly they found important to re-
duce taxes.
66.7% of the individual entrepreneurs found important to slow down in-
flation. A similar answer was given by 30-40% of the other types of enterprises.
Individual entrepreneurs and co-operatives also found that centrally organised
interventions should play an important role in improving infrastructure. 44.4%
of the individual entrepreneurs expected government actions for reducing taxes.
The view on reducing interest rates, slowing down inflation and reducing taxes
were similar in all forms of ownership. The enterprises with solely legal person
members thought other governmental measurements were needed as well.
The need for interventions by local governments appeared in improving
the local infrastructure of the enterprises, and providing services for small enter-
prises. 40% of the interviewed companies think it is important to improve infra-
structure, according to the figures (51.9% of the firms) it is most needed in vil-
lages. The respective data for large towns and other settlements are 44%, 20%,
22%.
To provide services needed for small enterprises was considered im-
portant by 22% of the interviewed. It was articulated mostly by companies
operating in towns. Only a fragment of the enterprises (total of 5) saw the
importance of providing training and retraining at the local level. From the
167 enterprises 21% were complaining about the lack of other conditions,
especially in larger and small towns (Table 47).
According to individual entrepreneurs (44.4%) local governments should
play an important role in providing training and retraining programs also to im-
177

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
prove local infrastructure. 22.2% of the individual entrepreneurs missed the ser-
vices for small enterprises and other measurements.
Table 47
The hierarchy of importance of local authority interventions in order to
develop private entrepreneurship (number of answers)
Co-opera-  Businesses
Businesses
Businesses
Local authority's
Private
five
based exclu-  based on pri- based exclu-
interventions
Total
firms
associa-  sively on pri-  vate and le-  sively on le-
tions
vate persons
gal entities
gal entities
Providing training and
retraining programs
4
1
13
3
1
22
Setting up schools of bu-
siness and technology
0
0
5
0
0
5
Improvement of local
infrastructure
4
1
37
11
4
57
Providing services
SMEs need
2
0
18
1
1
22
Other
2
0
22
2
4
30
None
1
1
21
5
3
31
Total
13
3
116
22
13
167
From the 3 co-operatives 1 emphasised the importance of training the
other of the infrastructure development. From the enterprises with different ow-
nership structure only the ones with solely natural person members felt the
significance of providing business and technical schools at local level. In this
circle of enterprises a demand for enhanced infrastructure, the issues of provid-
ing services, training and retraining for them were their main concern. The en-
terprises formed by natural and legal persons (55%) expected infrastructure de-
velopment from local governments. 15% of them thought training and retrain-
ing important 25% of this form of enterprises are not expecting any kind of in-
tervention or measurement taking by local governments.
40% of the ventures of legal persons also considered local infrastruc-
ture investments necessary. 10% of them found training and retraining impor-
tant, also to create the conditions for rendering services for small enterprises at
the local level. According to this circle of enterprises local authorities should
play an important role in other areas as well.
178

Hrubi, László – Kraftné Somogyi, Gabriella : Small and Medium-Sized Firms and the Role
of Private Industry in Hungary. Pécs: Centre for Regional Studies, 1994. 206 p.
Discussion Papers, No. 19.
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206

Discussion Papers 1994. No. 19.
Small and Medium-Sized Firms
and the Role of Private Industry in Hungary
Papers published in the Discussion Papers series
No. 1 OROSZ, Eva (1986): Critical Issues in the Development of Hungarian
Public Health with Special Regard to Spatial Differences
No. 2 ENYEDI, Gyorgy — ZENTAI, Viola (1986): Environmental Policy in
Hungary
No. 3 HAJDU, Zoltan (1987): Administrative Division and Administrative
Geography in Hungary
No. 4 SIKOS T., Tamas (1987): Investigations of Social Infrastructure in Ru-
ral Settlements of Borsod County
No. 5 HORVATH, Gyula (1987): Development of the Regional Management
of the Economy in East-Central Europe
No. 6 PALNE KOVACS, Ilona (1988): Chance of Local Independence in
Hungary
No. 7 FARAGO, LAsz16 — HRUBI, LAczki (1988): Development Possibilities
of Backward Areas in Hungary
No. 8 SZORENYINE KUKORELLI, Iren (1990): Role of the Accessibility
in Development and Functioning of Settlements
No. 9 ENYEDI, Gyorgy (1990): New Basis for Regional and Urban Policies
in East-Central Europe
No. 10 RECHNITZER, Janos (1990): Regional Spread of Computer Techno-
logy in Hungary
No. 11 SIKOS T., Tamas (1992): Types of Social Infrastructure in Hungary (to
be not published)
No. 12 HORVATH, Gyula — HRUBI, LaszIO (1992): Restructuring and Re-
gional Policy in Hungary
No. 13 ERDOSI, Ferenc (1992): Transportation Effects on Spatial Structure of
Hungary
No. 14 PALNE KOVACS, Ilona (1992): The Basic Political and Structural
Problems in the Workings of Local Governments in Hungary
No. 15 PFEIL, Edit (1992): Local Governments and System Change. The Case
of a Regional Centre
No. 16 HORVATH, Gyula (1992): Culture and Urban Development (The Case
of Pecs)
No. 17 HAJDU, Zoltan (1993): Settlement Network Development Policy in
Hungary in the Period of State Socialism (1949-1985)
No. 18 KOVACS, Terez (1993): Borderland Situation as It Is Seen by a So-
ciologist

Discussion Papers 1994. No. 19.
Small and Medium-Sized Firms
and the Role of Private Industry in Hungary
The Discussion Papers series of the Centre for Regional Studies of the Hun-
garian Academy of Sciences was launched in 1986 to publish summaries of re-
search findings on regional and urban development.
The series has 3 or 4 issues a year. It will be of interest to geographers, econo-
mists, sociologists, experts of law and political sciences, historians and every-
body else who is, in one way or another, engaged in the research of spatial as-
pects of socio-economic development and planning.
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Forthcoming in the Discussion Papers series
The Legal-Administrative Questions of Environmental
Protection in the Republic of Hungary
by
BENKONE LODNER, Dorottya