Discussion Papers 1999. No. 30.
Industrial Restructuring in the Budapest Agglomeration
CENTRE FOR REGIONAL STUDIES
OF HUNGARIAN ACADEMY OF SCIENCES
DISCUSSION PAPERS
No. 30
Industrial Restructuring in the
Budapest Agglomeration
by
Gyiirgyi BARTA
Series editor
Zoltan GAL
Pecs
1999
Discussion Papers 1999. No. 30.
Industrial Restructuring in the Budapest Agglomeration
Publishing of this paper is supported by the
Research Fund of the Centre for Regional Studies, Hungary
Research Fund of the Centre for Regional Studies, Hungary
This work was supported by the Research Support Scheme of the
Open Society Institute (OSI/HESP, grant no. 1552/1997).
ISSN 0238-2008
© 1999 by Centre for Regional Studies of the Hungarian Academy of Sciences
Technical editor: Ilona Csape, Zoltan Gal
Typeset by Centre for Regional Studies of HAS Printed in Hungary by Stimegi
Nyomdaipari, Kereskedelmi es Szolgaltato Ltd., Pecs
Discussion Papers 1999. No. 30.
Industrial Restructuring in the Budapest Agglomeration
reface
uring the transition from the state-planned economy to a market economy, the
ungarian industry has fundamentally changed: Its "physical" size has radically
- creased, but after a few years of a deep recession, industrial production began to
i crease again. The industry has undergone some thorough restructuring, its net-
ork of connections has become disaggregated, and it began to rebuild itself. Bu-
pest' s position is exceptional within the national industrial framework. After a
- eper recession and a slower recovery than the national average showed, Buda-
- st still represents the largest industrial concentration within Hungary. It is un-
c rtain, however, whether the main reason for the deeper industrial recession was
t at Budapest followed a Western city-model with its radical process of de-
i dustrialisation, or rather more the gradual economic/industrial transformation
( rom the state-planned economy to a market economy) that took place at the same
t me.
There is other open questions: Will the result be a unique Eastern Euro-
- an/Hungarian model, or will this region not be able to avoid the problematic
ath of development of the South-Asian industrialising countries? According to
other scenario: Will Hungary's and Budapest's economy emulate the growth of
andicraft-type industries similar to the so-called Italian model?
This work was supported by the Research Support Scheme of the Open Soci-
y Institute (OSI/HESP, grant no. 1552/1997). Its purpose was to show the
anges in the industry of the Budapest agglomeration, and to sketch probable
f ture trends. Finally, we also wanted to tentatively answer the questions above...
esearch on this developing phenomenon cannot, by any means, be definitely
11011 vered by this study. But it would be important to use the results of this type of
r • search for drawing up development concepts for Budapest and its agglomera-
t on.
I would like to thank Thomas R. Richers and Andras Szigeti for discussing,
t anslating and digitising some elements of this study.
udapest, 13 September 1999
Gyorgyi Barta
Centre for Regional Studies
1538 Budapest 114. P.Box 527
E-mail: 410136bar@ella.hu
3
Discussion Papers 1999. No. 30.
Industrial Restructuring in the Budapest Agglomeration
FIGURES
igure 1:
Traditional industrial districts /21
igure 2:
Present location of industry /24
igure 3:
New industrial development in Budapest /25
igure 4:
Towns of the Budapest agglomeration with important industry /30
igure 5:
Ring of towns around Budapest /31
ABLES
able
1:
Decreasing industrial work force in Budapest (1965-1989) /15
able 2: Increase in number of the active population in Budapest and in
the national economy /16
able 3: Increasing share of commuters in Budapest's economy /17
able 4: Budapest's decreasing industrial work force (1990-1997) /18
able 5: Turning points in the development of the Hungarian economy
after 1989 /20
able 6: Industrial employees in the Budapest agglomeration, 1997 /20
able 7: Research and development in Hungary /34
able 8: Research and development in Budapest, 1997 /35
able 9: Industrial production /36
able 10:
Changing employment structure in Budapest /37
able 11 :
Sectoral structure of Budapest's economy, 1996 /37
'
able 12:
Changing size structure of enterprises /38
able 13:
Enterprise size structure in the EU, Hungary and Budapest,
1996 /39
able 14:
Changing structure in the production and employment of
industry /39
able 15:
Medium-term forecast for Budapest's industry
(1999-2002) /46
7
Discussion Papers 1999. No. 30.
Industrial Restructuring in the Budapest Agglomeration
CONTENTS
1. Introduction /9
1.1. Possible future paths for the Hungarian economy /9
1.2. Bridging the gap and the industrial development in Hungary /11
1.3. Potential models for the industrial restructuring in Budapest /12
Restructuring in the industry /15
2.1. Changing industrial resources /15
2.1.1. Industrial workforce / employment /15
2.1.2. Industrial space /21
2.1.3. Capital/foreign direct investment /29
2.1.4. Education — innovation — economic growth /33
2.2. Structural changes /36
2.2.1. Recession and restarting in the industrial production /36
2.2.2. Changing industrial structure /36
3. Future development of the industry /41
3.1. Economic concentration and central functions /41
3.2. Future industrial changes /45
3.3. Industrial, technological and scientific parks /48
eferences /52
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Discussion Papers, No. 30.
1 Introduction
1.1 Possible future paths for the Hungarian economy
• fter the change of the political system many a prognosis has been written about
he future possibilities of Central and Eastern European economies in general and
he Hungarian economy in particular. However, the entire region — and Hungary is
of an exception — has not followed those early forecasts. The Hungarian econ-
my, for example, has changed much more dynamically and in a more promising
ay than had been expected. Nowadays we are not dreaming anymore about its pe-
ipheral or semi-peripheral situation in the developed world, but much more about
its potential role in bridging the gap...
H. J. Dunning (1993) refers to three possible models, or scenarios, of de-
elopment in Central and Eastern Europe:
• the developing-country model,
• the reconstruction model,
• the systemic model.
The developing-country model starts from the assumption that the countries of
astern Europe will develop along similar lines as the 'emerging' industrialising
ountries such as Brazil, Mexico, Malaysia, South Korea, Taiwan and Singapore.
he reconstruction model takes West Germany and Japan after the Second World
War as examples. And, finally, the systemic model combines the two models men-
tioned above. All three models are based on the assumption that foreign direct in-
vestment will be there to assist in the process. The systemic model offers the hy-
pothesis that the speed, structure and quantity of FDI will somehow adjust auto-
matically to the absorption capacity and willingness to make good use of FDI on
the part of the host countries (Hans van Hastenberg, 1999).
Before examining the validity of these models, we have to first realise that
Central and Eastern Europe is not a homogenous region anymore, as its countries
have developed in very different ways during the past decade. To begin with, we
can divide this region into two parts, the more developed countries, such as Po-
land, the Czech Republic, Hungary, Slovenia as well as Slovakia, and a less devel-
oped area (Romania, Bulgaria, Yugoslavia, etc.).
Secondly, the development path chosen by each country was directly related to
the actual situation that groups of the countries found themselves in at the time —
ust as the starting conditions of the countries of South America and Southeast
Asia were profoundly different from those of West Germany or Japan... So it is
important to underscore the importance of the respective starting conditions in or-
der to decide whether we can compare the developments of the countries of Cen-
tral and Eastern Europe at all. Applied to our study this means what criteria to use
for assessing Hungary's development, in particular.
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Discussion Papers, No. 30.
According to J. Kornai (1993) the centrally planned economies were rather mis-
developed than un-developed. As a consequence, we have to analyse what were the
starting conditions of these economies, what did the centrally planned system dis-
tort or what did it destroy irreversibly, and what were the usable assets left after
the change of the system. As a next step, we have to examine whether any of the
Central and Eastern European ex-socialist countries, especially any of the more
developed countries, found, created or followed a model significantly different
from the three models mentioned by Dunning.
Thirdly, the above development models are mostly described as positive exam-
ples. No doubt, the countries of Southeast Asia managed to rise from the periphery
of the developed world to the category of semiperiphery during the second part of
the 20th century. For several decades, their development was the most dynamic in
the world. But today it is justified to ask if the South Asian, i.e. the developing-
country, model really provides a developmental scenario worth following.
After the still unresolved monetary, capital and economic crises in this region,
this model may be discarded as a "dead-end street" because of the excessive influ-
ence of the state in the economy, the crippling corruption and nepotism which are
perhaps cultural phenomena, but are definitely incompatible with economic effi-
ciency standards valid in the West. In other words, to emulate a successful West-
ern economy requires taking over the entire set of values, procedures, restraints of
state involvement and a preparedness to be an integral part of a globalised econ-
omy.
The developing-country model, when applied to Central and Eastern European
countries, is questionable also from another aspect: It seems that its competitive-
ness can be maintained only by rock-bottom wages and other ways to keep costs of
production low such as not caring for sustainable growth, but rather relying on the
exploitation of all available resources. This cannot be a long-term strategy, if only
from an ecological point of view. As the Asian development shows, poor domestic
consumption due to low-income consumers returned the former "tiger economies"
to stagnation or backwardness. Apart from other massive financial, structural and
political shortcomings, it was the dependence on mass-production by cheap, un-
skilled labour for a global market that unveiled the inherent weakness of the short-
lived South-East Asian economic miracles (Csefalvay, 1999).
Finally, the host countries, i.e. those who are hoping for FDI, cannot direct, but
only influence, the purposes of foreign investors in a limited manner. It is possible
to hamper FDI as happened, for example, in the Czech Republic, but to stimulate
the influx of foreign capital, if the political, social and economic situation of the
host country is unstable ore even hopeless, is almost impossible (Yugoslavia, Ro-
mania, Bulgaria or the Ukraine, for example, have a bad stand in this respect), and
to affect the structure of any FDI is practically out of the question.
As the last decade has shown, none of the Central and Eastern European coun-
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Discussion Papers, No. 30.
tries really had a choice to opt for a "model". But sound problem-solving and a
Icredible foreign policy pay off. It is obvious that the Hungarian economic policy
has stimulated FDI from the beginning, creating attractive circumstances for for-
ign capital in Hungary. But other conditions such as a stable political situation, a
market system much more matured than in the other ex-communist countries, a
more developed infrastructure, etc. also contributed to the fact that Hungary was
able to attract almost half of all foreign direct capital invested in Central and East-
m Europe after 1989. Per capita it still has the highest rate of FDI, topping Po-
land, Ireland, Japan.
Not all experts share the opinion about the exclusively positive influence of
FDI on host countries. The dependency theory (Wallerstein, 1986) states that the
host economy controlled by foreign capital cannot develop organically. This means
that linkages would not emerge in a natural way, income inequalities would polar-
ise society, the economy would become more vulnerable and exposed to interna-
tional economic developments, the majority of profits would be expatriated, and
the economy could not develop in a healthy way. The key point (and the answer to
the dependency theory) must be, however, whether FDI helps the technological
development, the "bridging-the-gap" process and the overall modernisation of the
host country or not.
Hungary seems to have reached a turning point in its economic development.
The next years will show whether Hungary is able to develop along a path differ-
ent from that of the industrialising East-Asian countries (if this should have been
the case until now) and develop economic characteristics similar to those found in
developed West European countries or not.
1.2 Bridging the gap and the industrial development in Hungary
The present organisational transformation of the Hungarian economy has been
characterised by a bipolar industrial structure. Companies and sectors that have
been successfully integrated into transnational networks and boast rapid growth
represent one extreme. These enterprises are for the most part owned by multina-
tional companies. It is estimated that this group of companies accounts for 60-70%
of overall industrial growth in Hungary. The number of small and medium-sized
enterprises linked to multinational companies has slowly started to increase as
well, especially in car manufacturing, electronics, the paper and packaging indus-
tries. By contrast, the majority of firms are located at the opposite 'pole'. Their
production is either stagnant or increasing only at a very slow rate, and their prog-
ress in technological innovation is poor. These companies manufacture only for a
small domestic market. (A similar classification of firms divides enterprises into
non-export-oriented, assembling-exporting and export-oriented domestic compa-
nies (Elteto and Sass, 1997).
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Discussion Papers, No. 30.
Several case studies and research projects have demonstrated that the inte-
gration of foreign companies in the Hungarian economy, those of multinational
companies in particular, is a very slow process. At the same time, it would be ap-
propriate to characterise these enterprises as isolated enclaves. Connections be-
tween companies representing the two poles of Hungarian economy, i.e. enter-
prises producing for the domestic market, mostly in Hungarian ownership, on the
one hand, and multinational companies together with their subcontractors, on the
other hand, are quite limited. Furthermore, subcontractors of multinational compa-
nies are often foreign companies themselves; domestic enterprises play a fairly
minor role in the new division of labour (mostly in manufacturing activities re-
quiring low technological standards and an unskilled, cheap workforce).
What is described above are the general processes that determine overall tech-
nological standards in the Hungarian economy as well as its relative position in
comparison to leading economies. There is no doubt that the initial emergence of
foreign direct investments as well as its by now enormous contribution to produc-
tion have had a highly stimulating effect on the Hungarian economy. Economic
growth and the expansion of exports is mostly due to this set of companies. Their
technological standards often involve the actual import of the latest manufacturing
technologies and processes, but are in any case more advanced than the Hungarian
average.
Such state-of-the-art standards, however, are spreading very slowly through the
economy. This is primarily explained by the fact that an increasing differentiation
of companies and a peculiar division of labour characterises the domestic econ-
omy. In other words, even though large foreign companies are rightly regarded as
'motors' of the Hungarian economy, the slow diffusion of higher technological
standards is to be attributed to their slow integration in the domestic economic en-
vironment (Barta, 1999).
1.3 Potential models for the industrial restructuring in Budapest
The bridging-the-gap development process affects the metropolis of Budapest dif-
ferently than the towns in the countryside. There is an endless discussion among
the experts (urban planners, economists, sociologists, geographers and politicians)
about what the characteristics of the developmental tendencies in Budapest econ-
omy are. What sort of pattern of world cities can the economic/industrial develop-
ment of Budapest be identified with?
Has Budapest followed the well-known Western city model with its radical
process of de-industrialisation? As we shall see in the details of this study, there
are unambiguous signs which verify this statement such as the dramatic decrease
in the number of industrial employees, the physical contraction of industrial space,
etc. (Enyedi, 1998).
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Discussion Papers, No. 30.
At the same time, there is also some contradicting evidence. From the middle of
the 90s, as industrial production and exports by the Budapest industry have actu-
ally increased. Foreign direct investments have been particularly more significant
with regard to the industry of the capital than domestic investments have. In the
new division of labour (both in the organisation of enterprises and between Buda-
pest and its agglomeration belt) the role of the industry of Budapest seems to be
strengthening.
Was the industrial recession of Budapest's economy in the early 90s caused by
the transformation from the centrally planned economy to a market economy or by
the de-industrialisation process? And after finishing the transformation of the
economy, will there be a smaller-size industry with a modern structure and strate-
gic importance forming in Budapest? Finally, can we state that a re-
industrialisation has taken place in Budapest?
The 'motors' of the recent Hungarian industrial development have been foreign
direct investments, particularly those by multinational companies. They have
stimulated a special development process, characterised on the one hand by the
property structure after privatisation, greenfield developments, dynamism of pro-
duction, exports, and profitability of the industry in Budapest. On the other hand,
this basically caused the industry to split into foreign and domestic parts, or into
the large, mainly foreign-owned companies and domestic SMEs. The big question
is: Where is the Hungarian industry heading? Will the gap widen, i.e. will the
drastic contraction of the weak domestic part continue, or will the gap eventu-
ally be bridged, with the domestic SMEs joining the foreign multinationals
in a much more favourable scenario? It means basically, that by avoiding the
'dead-end street' of South-Asian industrialising countries, whether a new
Eastern European or Hungarian model will result.
Such a model would without doubt be a fruitful and welcome fusion of ac-
cumulated knowledge, i.e. the rich human resources in Central and Eastern
Europe/Hungary and the foreign direct investments. In the process Budapest would
have an exceptional role, namely to provide the gateway and the bridgehead in the
reception of the foreign input in order to spread it over the rest of the country. In
industry, too, there are several effects to be observed. Not so much that industrial
activity leaves the capital, but rather more that a new transfer role is developing:
The FDI go (partly) into the industry of Budapest, i.e. foreign investors build their
headquarters, distribution centres as well as a part of their production facilities
there and, first of all, place the strategic elements such as control, managing, mar-
keting, research and development functions in Budapest. To fulfil these functions a
large subcontracting network has to be formed, which may stimulate the develop-
ment of SMEs, again particularly in Budapest.
There is, however, another scenario, differing from the former ones. It involves
the growth of handicraft-type industries similar to the so-called Italian model. Ac-
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Discussion Papers, No. 30.
cording to some opinions this would be particularly attractive for the Hungar-
ian/Budapest economy, because it might avoid the negative consequences of glob-
alisation (low wages and salaries, to remain a place for outsourcing less sophisti-
cated assembly work, i.e. a long-run backwardness in general).
There is some evidence already that this scenario is to be taken seriously: Ac-
cording to the latest figures, more than 60% of all Budapest enterprises, mainly the
small and medium-sized enterprises, are belonging to two branches only, the ma-
chinery industry and the wood, paper and printing industries. These facts theoreti-
cally allow to form industrial districts within the Budapest industry, based on co-
operation and division of labour. The accumulated industrial skill, the wide-spread
entrepreneurial mentality, the high level of education and training, and the Euro-
pean surroundings, i.e. the economic and geopolitical proximity to the Western de-
veloped world give some chance to the "handicraft industrial hopes", at least in
part.
Of course, we have to hasten to add that the Hungarian industrial heritage can-
not be compared with the old, traditional industrial culture of the towns in the Italy
of today. And, what is worse, 50 years of communism destroyed essentially this
heritage that was one of Hungary's assets.
In addition, the lack of capital is seriously hampering the development of an
Italian model, rendering the Hungarian economy very vulnerable.
And finally, the present international economic situation is quite different from
what it was for the flourishing period of the Italian model (in the late 70s and 80s).
The river it could enter now is no longer the same...
Summarising the ideas and concepts about the present and the future of the Bu-
dapest industry, our opinion is that it cannot emulate any given model, and it is
probably true, that the development of the Budapest industry cannot be regarded as
a model proper. But nevertheless this 'model' will be (or is) a mixture of different,
elements already mentioned: The proportion of the industry in the Budapest econ-
omy continues to decrease in the future similarly to the city development of West-
ern Europe; but the remaining or newly established industries will become a more
modern, more profitable sector than before; they will fulfil the technological trans-
fer role between the developed World and the Hungarian countryside (or, perhaps,
a larger region in Central and Eastern Europe); Budapest industry will be charac-
terised by a special structure: A large subcontractor network will support the for-
eign big enterprises (multinationals) on the one hand, and industrial districts will
be formed by SMEs in one or two sectors, on the other.
In all, it is certain that industry will continue to play an important role in the
future of the Budapest economy.
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Barta, Györgyi: Industrial Restructuring in the Budapest Agglomeration.
Pécs: Centre for Regional Studies, 1999. 53 p.
Discussion Papers, No. 30.
2 Restructuring in the industry
2.1 Changing industrial resources
2.1.1 Industrial work force / employment
Before 1989
The size of the industrial work force in Hungary had experienced a steady growth
since 1945. This trend was first reversed in Budapest, where the number of indus-
trial employees began to decrease around the middle of the 1960s (Table 1).
Table 1
Decreasing industrial work force in Budapest (1965-1989)
Year
Numbers
Absolute decrease Absolute decrease
Yearly rate of
(%)
decrease (%)
1965
620 313
—
—
O
•Zr
1970
602 312
18 001
2.1
r
r4
-
- VD
1975
519 936
82 376
13.7
en .
1980
427 478
92 458
17.8
0
1-
1985
341 852
85 626
20.0
O'
en
1989
N
288 045
53 807
15.7
Source: Budapest statisztikai evkonyvei(Statistical Yearbooks of Budapest), 1965, 1970,
1975, 1980, 1985, 1989. KSH (Central Statistical Office), Budapest.
It should be noted that the decrease in the size of the work force has not been
limited to Budapest's industry, other sectors of Budapest's economy have also
shown the same shrinking trend. The rate of decrease in these sectors, however,
has remained far below the industrial figures mentioned above, while it is true that
there has been a significant overall decrease in the number of the active population
in Budapest's economy.
The following questions should be answered in order to account for the de-
crease in the size of the industrial work force:
• What caused the decrease?
• Why did this process start in Budapest?
• Why was the decrease more significant in the industry than in other sectors
of the economy?
An analysis of the peculiar mechanism of the state-planned economy will pro-
vide the explanation to the processes described above. The state-planned economy
has been driven by a continuous internal pressure to expand. Companies have dis-
played insatiable hunger for new investments in this economic environment. These
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Discussion Papers, No. 30.
investments have never involved any risk to companies in a state-planned econ-
omy, since there has been no correlation between the profitability and investments
of a given company. The budget deficits of companies have always been balanced
again by the state. Thus availability and accessibility of resources (physical re-
sources, work force and capital) placed the sole restraint on investments. A con-
tinuous shortage of resources have remained characteristic of the state-planned
economy all throughout its existence (Kornai, 1980, 1993).
It took state-planned economies a certain amount of time to absorb surplus
work force. Large-scale investments in heavy industry have generated migration
waves between various regions in the first period. The supply of work force has
first started to dwindle in Budapest as early as the middle of the 1960s. Shortly
after, however, large cities have also started to struggle with a lack of the required
work force. Companies in search of additional work force have finally been forced
to establish industrial units and branch plants for the non-mobilizable segment of
the active population (Barta 1994).
It is no coincidence that Budapest has been first to experience the phenomenon
of labour shortage. The economy of Budapest has always been the largest single
industrial agglomeration in Hungary, showing dynamic development in the post-
war period as well (in spite of the fact that the largest investments have been car-
ried out elsewhere). The average increase of the work force of Budapest's econ-
omy has exceeded that of the national economy (Table 2).
Table 2
Increase in the number of the active population in Budapest and in the national
economy
Year
Number of active
Increase (%) (Previ-
Number of active
Increase (%)
population in
ous year as 100%)
population in
(Previous year as
Budapest
Hungary
100%)
1949
766 101
—
4 409 299
—
1960
983 897
128.4
5 295 700
120.1
1970
1 110 669
112.9
5 010 300
94.6
Sources: A fovaros 120 eve 1873-1993. (The capital's last 120 years 1873-1993). A KSH
Budapesti es Pest Megyei Igazgatosaga (Central Statistical Office, Budapest and
Pest County Departments), 1994. Statisztikai Evkonyvek (Statistical Yearbooks),
1950, 1971. KSH (Central Statistical Office). Budapest.
The natural increase of Budapest's generally ageing population could not fill
the insatiable demand for additional labour. In addition, the level of employment in
Budapest has always been higher than the national average. Hence the migration
wave to the capital's economy from other more backward, predominantly agricul-
tural regions.
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Discussion Papers, No. 30.
Whatever the type of the work force, however, it can only be partially mo-
ilised, even if it is not bound to a given locality through administrative regula-
ions. To what extent the work force can be mobilised depends on the actual ratio
f available jobs and those seeking employment. When there is an abundant supply
f labour, or even a surplus work force, those seeking employment will naturally
o wherever jobs are available. By contrast, when there is an excess in employ-
ent opportunities and shortage of labour, those seeking employment will be able
o exercise their preferences and choose their place of employment near to their
lace of residence. A considerable part of those seeking employment will remain
Oon-mobilisable in any case, but will be prepared to work locally.
Obviously, this process could have been influenced by regional differences in
wages. Given the strictly regulated wage-system of the state-planned economy,
owever, in which wages were largely unrelated to performance (between indi-
iduals and companies as well as between sectors) and wage differences did not
ruly represent demand and supply on the labour market, the slightly higher wages
n Budapest could less and less offset the advantages of being employed locally.
Jne could thus save time and energy spent on long-distance commuting. Despite
hese developments, the share of commuters has reached unprecedented figures in
B udapest's economy (Table 3).
r able 3
Increasing share of commuters in Budapest's economy
Year
Number of commuters in Budapest
Share of commuters in Budapest's
total work force (%)
1960
139 402
11.7
1970
204 315
15.8
1980
205 062
17.0
1990
196 431
18.1
ource:
5
Nepszamlalas (Census) 1960, 1980, 1990, KSH (Central Statistical Office).
It has been noted above that the decrease in the size of the industrial work force
was more significant than that in other sectors. Explanations which could ade-
ivately account for similar processes in a market economy prove useless in the
Hesent context, since there fhas been a very low correlation between the profit-
ibility of branches and companies, investment perspectives and actual wage-levels
Kornai, Matits 1986). It was decidedly not the case that weaker sectors and corn-
anies lost ground to more productive and profitable economic sectors and compa-
ies.
The higher rate of decrease in the industrial sector can only be explained by the
iscrepancies in the wage-system. Employers less bound by the rules of the regu-
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Discussion Papers, No. 30.
lative wage-system enjoyed a definite advantage in the 'struggle for labour'. Com-
panies where employees could illegally or semi-legally increase their income had
similar advantages. Thus the private sector of the economy, private joint-
enterprises and even co-operatives (this period saw the prospering of the subsidi-
ary, usually industrial activities of agricultural co-operatives), which were inde-
pendent of or only partly subject to state wage-regulation, as well as professions
where tipping was customary (doctors, hairdressers, cabdrivers, etc.) could easily
attract labour from large industrial companies, the workers of which belonged to
the lowest income bracket.
Those working in professions deemed to be of strategic importance (leaders of
the political and economic life, engineers, lawyers, doctors, etc.) have drawn sala-
ries higher than the average in other areas of the economy, though the differences
were not as great as usually found in market economies. These strategic profes-
sions were strongly concentrated in Budapest.
After 1989
The size of the industrial work force has decreased dramatically in Budapest
after 1990, the number of jobs in Budapest's industry has halved once more be-
tween 1990 and 1994. Though it has slowed down somewhat, the same trend
seems to be at work today (Table 4).
Table 4
Budapest's decreasing industrial work force (1990-1997)
Year
Number of employees
Decrease in numbers
Yearly rate of decrease
(%)
1990
277 851
10 194
3.5
1991
239 104
38 747
13.9
1992
195 273
43 831
18.3
1993
164 797
30 476
15.6
1994
140 614
24 183
14.7
1995
126 902
13 712
9.8
1996
116 940
9 962
7.9
1997
109 835
7 105
6.1
Source: Budapest Statisztikai tykOnyve (Static ical Yearbook of Budapest), 1994, 1998. A KSH Bu-
dapesti es Pest Megyei Igazgatosaga (Central Statistical Office, Budapest and Pest County
Departments).
In addition to the decrease in the size of the industrial work force, new in-
dications of a contraction of industry have appeared. Changes have reached the
company level, most spectacularly shown by the disintegration of the giant
companies of the state-planned economy. Although this process had already started
in the 1980s with the state-initiated breaking-up of trusts, the disintegration of
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large companies was accelerated when the transformation of company
organisations became compulsory. (This compulsory reorganisation transformed
traditional companies of the state-planned economy into corporations, i.e. state-
owned companies operating in a market economy.) The various economic
activities of large companies were separated and organised into independent
company units in the process of this organisational transformation. It is
understandable that this campaign, already complete by 1993, resluted in the
fragmentation of large companies.
There are scores of examples to illustrate this process. The case of the Csepel
Iron and Metal Works in Budapest, a company with a great tradition, is only one
out of many. Approximately 30 000 people worked here in the 1970s. This trust
was first split into 15 independent companies in 1983 and subsequently into 22 in-
dependent units in 1990. The orginal trust's assets are now shared between as
many as 170 proprietors. (Nagy, A. 1996)
The majority of large industrial companies went bankrupt by the combined ef-
fect of a market crisis (declining export markets, the collapse of the COMECON in
particular, as well as a significant drop in domestic demand) and their inherited
and quickly growing indebtedness, in short, they were unable to adapt to the new
circumstances (Barta, 1993).
Many companies had first closed their branch plants in the countryside, then
laid off a part of their workforce at their company headquarters and were finally
forced to shut down entirely. About 2500 companies went bankrupt between 1992
and 1995, 30% of which were headquartered in Budapest.
The turning point was in 1993, when the industrial production began to grow
(Table 5).
The "first turning point" in 1992 has affected the labour market only 4-5 years
later. The stagnation of the labour market or a very slight increase in employment
in the manufacturing sector began in 1996 and 1997. This meant that in a few sec-
tors of the industry restructuring had been completed.
In the Budapest agglomeration — where the number of employees decreased
more drastically compared with the national average — the diminishing tendency
continued even after 1996, but at a slower rate. Nevertheless, the biggest Hungar-
ian industrial concentration is still to be found in the Budapest agglomeration —
with approximately 130 000 jobs. However the division of labour between Buda-
pest and its agglomeration belt has changed. There is a dynamic shift of industrial
activity from Budapest into the agglomeration belt. The employment proportion of
industry (29.6%) in the agglomeration belt has exceeded that of its population
(24.5%), and in the towns of the agglomeration belt the number of industrial em-
ployees per capita has exceeded that of Budapest. However the administration of
industrial companies is still concentrated in Budapest (with more than 70% of em-
ployees). (Table 6.)
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Table 5
Turning points in the development of the Hungarian economy after 1989
Year
Industrial production
1993
Industrial productivity
1993
Domestic sales in industry
1993
Industrial export
1993
Investment into the economy
1993
Investment in industry
1992
GDP
1994
Increasing industrial employment
1996/97
Decreasing rate of growth in unemployment
1994
Source: Munkatigyi politika es munkaugyi folyamatok (Labour policy and Labour Issues),
1994-1998, Munkatigyi Miniszterium (Ministry of Labour Affairs); Az ipar ter-
melesi es ertekesitesi strukturaja (Production and Marketing Strategy of Industry)
1985-1997, KSH (Central Statistical Office), Budapest, 1998.
Table 6
Industrial employees in the Budapest agglomeration, 1997
Distribution of the workforce
Industrial employees per 1000
(%)
inhabitants
Budapest
70.4
58
Agglomeration belt
29.6
51
Total
100.0
56
Source: Csabane: A budapesti agglomeraci6 az ezredfordul6 ktiszOben (The Budapest
agglomeration at the turn of the century). KSH (Central Statistical Office), Budapest,
1998.
New industrial centres have been forming in the agglomeration belt (Giidollo,
Veresegyhaza, Pomaz, Solymar, Ocsa stb.), and a few among the old ones have
strengthened during the last decade (Vac, Szazhalombatta). (Figure 1)
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Figure 1
Traditional industrial districts
Source: Study for OTKA (F016238), 1998; compiled by E.Kiss, Institute of Geography,
Hungarian Academy of Sciences
2.1.2 Industrial space
Before 1989 — spatial structure, a legacy of the past
Budapest's industrial development started to gather speed in the last decades of the
previous century. The framework of the future industrial structure took a definite
shape as early as the turn of the century. The location of industry was to a great
extent determined by the spatial layout of the transport network, especially that of
* This chapter is largely based on the study written by E. Kiss, Geographical Research Institute,
Hungarian Academy of Sciences, 1999.
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the railway system as well as by the vicinity of the Danube. Industrial development
before and after the Second World War hardly influenced the spatial structure of
industry in any substantial way.
By contrast, significant changes were brought about by the creation of 'Greater
Budapest' in 1950. As many as 23 settlements were administratively incorporated
into the capital, as a consequence of which the northern-eastern-southern crescent
of Budapest's industrial zone, previously lying along the city boundary, was now
jammed between the outer districts and the centre (Preisich, 1969).
The size of industrial areas did not increase significantly until 1980. It
amounted to 45 km 2 in 1986 — approximately 9% of Budapest's total territory.
Characteristic industrial zones were formed (Fig. 1).
• In the northern part of Pest (Ujpest and Angyalfold, IV. district) where light
industry (shoe, leather, cotton and furniture industry), machine industry (low
voltage electronics, transport vehicles) and chemical industry dominated.
• In the southeastern part of Pest (Kobanya, X. district) where production was
concentrated in the construction, food (beer and conserved food) and ma-
chine (Ganz-Mavag) industries.
• In the southern part of Pest (along the banks of the Danube, districts IX and
XX) attracting especially food industries (mills, meat and canned food in-
dustries).
• In Csepel (XXI. district) where the country's greatest company, the Csepel
Iron and Metal Works, was located. The Csepel Works employed 30 000
people during its most prosperous times. (In addition, an important paper
factory and a textile plant also settled in this area.)
• In Buda (III. district) where textile industry constituted the leading industrial
sector. Shipbuilding and agricultural machinery production were also im-
portant here.
• In the southern part of Buda (districts XI and XXII) concentrating textile
production and telecommunications-electronics.
No significant industrial activity could develop in the Budapest agglomeration
before the transition because Budapest's industry could not have survived without
the labour force of the agglomeration. Labour shortage was becoming ever more
acute from the middle of the 1960's, so that strict measures were introduced to
control the establishment of industrial production (and other economic activities)
in 44 settlements around the capital. The sparsely built-up settlements of the ag-
glomeration retained therefore a distinct rural character with an underdeveloped
infrastructure.
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After 1989
The industrial development of the Budapest agglomeration after 1989 has had
significant spatial consequences:
• Most spectacularly, many of Budapest's industrial areas have been vacated
and are now being re-used for other purposes.
• A less important though undeniably present trend is manifested by renewed
activities in traditional industrial areas in some parts of Budapest.
• Some new industrial areas have been formed, mostly as greenfield in-
vestments along the administrative boundaries of the capital.
• Due to deep structural changes in the division of labour, an important share of
industrial activities has been relocated to agglomeration areas. This develop-
ment is primarily to be attributed to greenfield investments, although some of
the already existing industrial production has also been moved out of Budapest.
Generally speaking, it can be said that the complete termination of industrial
activities and the functional restructuring of areas has been characteristic of the
northern and northeastern parts of the city, whereas partial or complete renewal of
industrial activities has prevailed in the southern and southeastern areas. It must be
noted, however, that a new trend has also become observable in recent years. Dif-
ferences in how industrial areas are being re-designated reflect less and less the
former north-south divide in the city. Priorities have become rather more depend-
ent on the distance of the given area from the centre. In other words, traditional in-
dustrial areas lying closer to the city-centre or are otherwise more accessible
(transport) have been subject to a complete functional change, whereas renewal of
industrial activities has been typical in peripheral areas. On the whole, this dual-
way development has been mostly taking place in a so-called transitional zone lo-
cated between densely populated inner districts and the suburban ring.
Functional changes have first started in industrial areas situated in the north-
ern part of the city (IV. district). This area has boasted the most dynamic changes
as well. The main axis of this area is the `Vki , on the western side of which
(lying closer to the Danube) industrial enterprises have been largely replaced by
tertiary activities (trade and maintenance). Nowadays, remaining parts of old in-
dustrial companies are only to be found sporadically here.
By contrast, restructuring, renewal of industrial activities and reconstruction of
industrial plants has been characteristic in the southern, southeastern part of the
city (districts XX, XXI, XXII).
Only enterprises that accommodated particularly
space-demanding activities or were particularly hostile to the environment have
had to move out from here or close down production. In all probability, however,
industrial enterprises will continue to produce in these areas in the long-run as
well. This prediction is supported by statistical figures: Relatively fewer industrial
enterprises have ceased to exist in these areas in recent years, while new invest-
ments have continued to remain high (Fig. 2).
23
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Figure 2
Present location of industry
Source: Study for OTKA (F016238), 1998; compiled by E. Kiss, Institute of Geography,
Hungarian Academy of Sciences
A new tendency in the development of the capital's spatial structure is the
emergence of an industrial ring along the city boundaries. This is mostly due to
greenfield investments that have nevertheless preferred to settle next to former in-
dustrial areas (e.g. greenfield investments in the XVI I, XVIIth and XVIII1 districts
and enlargements of former industrial areas in the III'', X th and districts,
Fig. 3). The emergence of such zones at the city boundaries results from a sponta-
neous urban development process.
24
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Figure 3
New industrial development in Budapest
•
Greenfield investments
O
Surviving old industries
Industrial areas proposed for rehabilitation
Compiled by L. Koszor, A. 1999.
Such greenfield investments highlight the interesting fact that Budapest still has
a great number of vacant plots. It follows from this that the lack of available space
cannot explain the relocation of industry into the agglomeration or even more dis-
tant regions. The real reason is to be sought rather in changes in the real estate
25
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Discussion Papers, No. 30.
market. The accessibility of this new industrial zone through public roads is cer-
tainly a relative advantage. At the same time, the congestion of these roads as well
as the unsatisfactory and costly rail infrastructure hinder development in this area.
The changes described above offer a bird's-eye view of the industrial structure
and hardly penetrate the microenvironment of individual companies. According to
a survey covering the entire capital, on 30-35% of all industrial areas, the size of
the territory occupied by industrial companies has not changed. This finding does
not exclude possible reorganisations and re-constructions on existing plants (e.g.
Richter Gedeon Pharmaceutics, Zwack Unicum Beverages, Chemical Industry
Technology, Ferencvaros Millworks, etc.) At the same time, the size of the terri-
tory occupied by the majority of industrial companies has significantly decreased
on approximately 65-70% of all industrial areas. This is less to be attributed to in-
dustrial recession than to an increasingly rational siting policy pursued by indus-
trial companies as well as to a rapid increase in real estate prices in the capital. It is
not surprising therefore that there has hardly ever been an increase in the size of
the terrain occupied by companies founded before 1989.
At present 4.5-5% of the capital's territory is occupied by industrial activities,
still mostly in the mixed-profile transitional zone. It is no longer possible to point
out industrial areas similar to those before the transition, the main reason being
that traditional industrial companies have sold or leased parts of their plants not
required for maintaining production. In addition, vacant industrial areas have
mostly been occupied by non-industrial enterprises as well, a development which
has led both to the growth of this transitional zone and its lacking a homogeneous
economic profile. On the whole, the share of industrial activities has become
smaller and less concentrated in this zone.
Nevertheless, the following areas still show a characteristic economic ori-
entation in Budapest:
• Areas preserving their original industrial use (constituting larger connected
areas in the IVth, IXth, Xth,
XIIIth and XXV districts).
• Mixed-use areas (industry and tertiary sector). Vacant areas formerly used
by industrial companies have been occupied here by industrial, commercial
and service enterprises. There is no doubt that traditional industrial areas
have also seen a certain degree of re-industrialisation. It is still unclear what
will happen in the long-run to areas leased by still existing industrial compa-
nies: whether they will cease to be used for industrial purposes or whether
they will be re-occupied by the company in the course of a subsequent ex-
pansion. Leasing unprofitable areas has been an important financial means of
survival for many companies. This practice may well be reconsidered now
given the fact that the capital's real estate prices have grown at a very high
rate in recent years.
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In general, however, the tendency outlined here seems irreversible. Impressive
examples abound. More than 170 different companies of various sizes share the
massive production plant of the former Csepel Works. Half of the 85 buildings
situated on the 32,000m 2 large area of the Obuda Shipbuilding Works has been
taken down, the other half houses various non-industrial activities (serving cul-
tural, educational, sports and business purposes). A new industrial park in Ujpest
which accommodates approximately 20 companies has been developed at the for-
mer site of the Ujpest Textile Works.
This kind of coexistence raises new problems. Conflicts are generated by the
fact that unallocated public utilities and roads have to be shared among the new
enterprises. Fluctuation of companies is very high in the transitional zone, change
of ownership is frequent. This situation is further complicated by unregulated
ownership relations which also involve many 'phantom companies'. This unregu-
lated ownership structure is a most unwelcome fact in terms of urban planning and
development because it can pose a long-term obstacle to the re-zoning of a given
area.
• Exclusively tertiary function areas (trade and maintenance). This is the other
most frequent form of land use. 15-20% of former industrial areas have been
re-zoned in this way (several examples are to be found in the northern Pest
area: Shopping centres and services of various sizes are now located on the
premises of a former metal works, the once well-known shipbuilding plants
were taken down to make room for one of Budapest's largest shopping cen-
tres).
• Areas whose designated use was for administrative or office functions. The
size of former industrial areas utilised in this way amounts only to a few per-
cent. Most characteristically, buildings previously used for industrial pro-
duction have been reconstructed to accommodate the new function (e.g.
premises of Perion Batteries, ELGEP, Rico Bandages in the XIIIth, IX th and
Xth districts), although sometimes buildings have been taken down altogether
to make room for new office space (e.g. International Trade Center and Duna
Office on the Vaci tit). It must be added that despite rapid progress in the
construction of new office buildings in Budapest, this function has been slow
to relocate to the transitional zone and Buda.
• Areas with residential functions. The re-designation of former industrial ar-
eas for such purposes has been fairly untypical. This is primarily to be at-
tributed to the fact that industrial areas are usually polluted, geographically
and socially unattractive. Attempts in the IX 1' and xillth districts to construct
homes in place of former industrial premises have not been unequivocally
successful. (The construction of 451 homes in the Gilimb utca was aban-
doned, for instance. On the other hand, the newly built residential park in the
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IXth district has proven to be one of the most successful examples of urban
reconstruction in Budapest.)
It is to be noted that real estate prices have been increasing rapidly in the last
two years, especially in more attractive areas (i.e. Buda, downtown Pest, XIII th
district, etc). Even flats in better housing estates have become more valuable.
Other functions. Such areas are scattered at various places in the city. Their
limited size makes their refunctioning difficult. This group also includes areas
used temporarily for storage and parking. There are several industrial areas where
production buildings have already been taken down but no new use has been as-
signed to the area yet. In some cases ruins of the abandoned buildings still exist
(e.g. some buildings of the Csepel Works, Csepel Bread Factory, Soroksar Textile
Works).
• Industry in the Budapest agglomeration
The capital's outstandingly dynamic development has positively influenced the
agglomeration as well. As much as one-third of all investments in Hungary have
been realised in Budapest. The agglomeration on the other hand profited from 80%
of enterprises in Pest county. In addition to shipping, postal services and telecom-
municatons, industrial sectors have attracted the largest amount of investments.
These investments have been chiefly responsible for the acceleration of the ag-
glomeration development. The most important aspect of this development is the
strengthening of local economies. In the course of a general urbanisation, various
political and economic institutions of local government have been established. The
majority of commuters have now become entrepreneurs themselves in the local
service industries as well as construction and small-scale industrial companies.
Such enterprises now generate demand for each other's products and services as
well.
The output of the local economy is not limited, however, to satisfying the needs
of the local population and small-scale enterprises. The Budapest agglomeration
has been attractive for major investments as well. There is an abundant supply of a
cheap, skilled, versatile work force, enough space, a relatively advanced infra-
structure as well as low taxation. In addition, Budapest's vicinity generates further
demand and makes various joint-ventures possible. The agglomeration is in many
respects better suited for greenfield investments than the capital's administrative
area. This explains why the interest of foreign direct investments has remained
constant here in recent years. It can be concluded, therefore, that the launching of
new enterprises has been the characteristic trend and not the relocation of compa-
nies from Budapest. As has already been mentioned, a considerable share of the
work force employed here is recruited from the ranks of former commuters which
in turn allows for a steady employment of skilled labour and maintening previ-
ously established economic connections.
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In the last decade, greenfield investments have accounted for 20-25% of for-
eign direct investment nation-wide. The most attractive region has been the north-
west part of the country (Northern Transdanubia). 65-70% of greenfield invest-
ments have targetted this region. At the same time, many foreign investors, in-
cluding several multinationals, have opted for the proximity of the capital (e.g.
Tchibo, Tetra Pack, Coca-Cola, Sony, settling, especially since 1997, in various
towns of the agglomeration, such as Buda6rs, Dunaharaszti, God6116). Pest county
and Budapest had benefited from 18-20% of such investments by the end of 1997.
The machine industry has claimed two-thirds of all industrial investments, thus oc-
cupying the first place followed by the chemical and food industries.
The economic potential of the Budapest agglomeration is becoming in-
creasingly stronger. This region can hardly be regarded as homogeneous, however,
as spatial discrepancies are significant. Most importantly, the same east-west di-
vide can be observed in the agglomeration as in the capital or in the country as a
whole. The distance from the capital is another measure of differentiation, i.e. the
farther away from Budapest, the smaller the economic output.
Smaller towns are becoming important local centres within the agglomeration
itself. Half of all agglomeration enterprises are located in Erd, Budaors, Dunakeszi
and Gado116, four-fifth of the agglomeration industrial work force is employed in
Godo116, Vac, Szazhalombatta, Budaors and Szigetszentmikl6s. The greatest tech-
nological capital is concentrated in Szazhalombatta at the Duna Powerstation and
the Mol Oil Company (Fig. 4).
The agglomeration has by now considerably 'outgrown' its official boundaries.
The intensification of economic relations indicates an increasingly strong connec-
tion between the agglomeration and the northwestern region of Transdanubia. The
emergence of a number of rings in terms of economic prosperity can also be ob-
served, i.e. the ring of small agglomeration towns is surrounded by a 60-70 kilo-
metres wide ring of larger towns such as Szekesfehervar, Tatabanya, Esztergom,
Hatvan, Kecskernet, Cegled and Dunatijvaros (Fig. 5).
2.1.3 Capital/foreign direct investment
• Investments in Budapest's industry
Investments in Budapest's industry exceeded the average growth of all economic
sectors until 1995, started to fall in 1996 and then increased again in 1997. Invest-
ments of companies increased until 1994, the recession of the next two years was
once again followed by renewed growth (Bartha, 1998). The fluctuation in invest-
ment figures is to be attributed to some economic destabilisation, severe austerity
measures, high inflation and a shortage of capital.
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Figure 4
Towns of the Budapest agglomeration with important industry
O vac
• Kisoroszl
Du r bogdany
• Tahlt6ffalu
• Sz liget
• Pilisszentlasz16
P•6csme yer
Le eyf lu
•
• Vicrat6t
•
Szod
Pill szentkereszt
•
Szentendre
God
•
Orbottyan
P Isia'szfalu
Csom d
•
•
PIIIsszanto
•
Pomiz
•
Szlgetmonostor
•
doke
Cso ban
•
Plllscsab
Dunakeszl
Pilistorosv r
Tinnye
Budakal s
•
zentiva
• Pllisborosjeno
Fot
S
•
Pro
(m
Perbil
Solymar
•
•
Bud aj n
Nagyko
si
•
•
Telki
Zsambek
Bud:keszi
Hercegh to
BUDAPEST
•
O Buda• s
Blatorbagy
g
Torokbalint
SeskOt
•
DI•sd
•
Pusztazamor
• 011o
H isz lek
0
Erd
Sz ige tszentmi les
Dunah
ti
Fel:Opa o
z =thalom
• Taks • ny
• Alsonemedl
0
Szazhalo
atta
6csa
M
h
•
Delegyh'za
30
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Figure 5
Ring of towns around Budapest
ESZTERGOM
0
HATVAN
TATABANYA
0
Szigetszentmiklos
Szazhalombatta
0
CEGLED
SZEKESFEHERVAR
0
KECSKEMET
DUNAUJVAROS
City
Direct agglomeration belt
A Suburban districts
Towns
-0-
Ring of towns
Compiled by E. Perger, 1999
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It is important to note, however, that only 17-18% of domestic industrial in-
vestment went into Budapest's industry in 1996. This figure is significantly less
than the capital's overall share of investments in the national economy (36%) and
also less than the share of Budapest's industrial production of the national indus-
trial output (26%). These figures signify a nation-wide restructuring of industry,
i.e. a decreasing share of Budapest's industry, and by the same token the decreas-
ing importance of industry within Budapest's dynamically expanding economy.
Foreign direct investment has contributed very significantly to new investments
after the transition. As much as 50-60% of foreign direct investment has been
concentrated in Budapest. This implies that a growing part of investments in the
capital originates from foreign sources (25% in 1992 as opposed to more than 50%
in 1997). Especially American investors have been found to prefer the capital (al-
most three-fourths of American foreign direct investment has been channelled into
Budapest's economy) followed by Austrian and German investors.
The proportional share of foreign direct investment that has been attracted by
manufacturing was much higher than the share of domestic investments directed at
the same sector. This has also been the case in Budapest's industry. In 1996, 31%
of all foreign direct investment was taken up by Budapest's industry, foreign direct
investment amounted to 53% of capital registered here. Nevertheless, this figure
was already a mark of a significant and continuous decrease, since in 1991 more
than 50% of foreign direct investment in Budapest had been invested in the capi-
tal's industry. Industrial investments have not become less attractive, but at the
same time the prospects of investments in other sectors have improved. (In the
early 1990s, privatisation had generated a favourable environment for industrial
investments, whereas the real estate, banking and insurance markets were opened
up to investors only some time later. In addition, Budapest is obviously less ad-
vantageous for launching greenfield investments than the countryside.
The average (registered) capital of Budapest-based companies exceeded the av-
erage capital of companies not based in the capital over all economic sectors.
Manufacturing companies seated in Budapest registered on average 19% more
capital in 1996 than their counterparts in the countryside in the same year. 45% of
foreign direct investment in manufacturing was invested into Budapest-based
companies. The intensity of investments, i.e. the volume of investments per enter-
prise, has also been typically much higher in Budapest than elsewhere. Such con-
centrated investments indicate a longer-term investment policy in the capital (Ha-
mar, 1998).
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• Investment in the agglomeration
Approximately 40% of all investments were concentrated in the area of the Buda-
pest agglomeration (i.e. Budapest plus agglomeration) in 1996, 35-36% of which
were directly targeted on the capital. A higher share of investments into (imported)
modern, state-of-the-art machinery and equipment (and not into buildings or infra-
structure) than the national average was registered in the agglomeration. This ex-
plains why the area of the Budapest agglomeration has been steadily posting better
efficiency rates than the rest of the domestic economy.
A significant difference can be observed between the agglomeration and the
capital in terms of the sectorial structure of investments. As much as 75% of in-
vestments have been absorbed by the tertiary sector in the capital, only 20% by the
local industry and 5% by the construction sector (shipping, postal services and
telecommunications have been the main areas of investment in the tertiary sector).
By contrast, in the agglomeration almost 50% of investments have gone into in-
dustry. This difference underscores the changing division of labour within the Bu-
dapest agglomeration area which involves first of all the increasing weight of in-
dustrial production in the agglomeration itself. It can also be concluded that the
positive influence of the capital's economic prosperity does not lead to the emer-
gence of a homogeneous economic structure. In other words, the economy of the
agglomeration zone is likely to remain characteristically different from the struc-
ture of the capital's economy.
Foreign direct investments have played a decisive role in the agglomeration as
well. Foreign investors have tended to prefer manufacturing, the real estate sector
and trade here. In five out of the six significant economic sectors of the agglom-
eration, foreign interest in joint-venture companies exceeded 50% already in 1997.
2.1.4 Education — innovation — economic growth
According to some theory, education, innovation and economic growth are
strongly correlated, or they can be seen rather more like a one-directional chain re-
action: The pre-condition of innovations is a high level of education, and the motor
of economic development is innovation (Stevens, 1996).
In the transitional period of Hungary, this cause-effect relationship has been
loosening, or was even broken in some instances. Nowadays an important part of
the resources required for economic growth comes from abroad (investment capi-
tal, know-how, licenses, and even a part of the skilled labour dealing with the im-
ported technology). The domestic innovations have concentrated mainly on finding
methods of how to survive or adjust to the changing economic system, the market
economy. At present the economy is generally quite uninterested in the results of
domestic R&D. (Between 1990 and 1996, for example, the number of patents reg-
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Discussion Papers, No. 30.
istered in Hungary decreased from 647 to 170, and from 1158 to 176 registered
abroad. OMFB, 1997). Job qualification has become a selective advantage (or de-
valuated), as in the present stage of economic development the requirements con-
cerning education have changed drastically. Funding of research and development
and education depends on economic growth, but the economic prospects are not
promising enough to support the Hungarian knowledge base more generously than
was the case before the system change (Dory-Meszaros-Rechnitzer, 1998).
It can be seen that the number of researchers has been halved, the total amount
spent on R&D decreased by 60% (in real terms it hardly reached 20% of the sum
spent on R&D in Hungary in 1989). In 1997 the number of researchers as a portion
of the active population was 40% less in Hungary than the EU average (Table
7).
Table 7
Research and development in Hungary
1989
1993
1997
1997/89
(%)
Number of R&D institutes
1 312
1 380
1 680
128
Number of researchers
36 384
23 012
18 349
50
Total expenditure on R&D in relation to GDP (%)
1.96
1.0
0.76
39
Source: Engloner, Gy. 1998; OMFB, 1997
As far as R&D activity is concerned, the situation of Budapest is more fa-
vourable than that of the national average, but it is obvious, that the nega-
tive tendencies are noticeable in the capital as well. There are several rea-
sons why the decrease in R&D in Budapest was much less pronounced than
in the countryside:
• The Budapest population exhibits a much more entrepreneurial mentality
than one would find in other parts of the country. About 40-45% of all Hun-
garian enterprises have concentrated in the capital after the change of the
political system.
• Adjusting to the new economic situation came easier to the Budapest enter-
prises during the economic restructuring, they met the requirements of the
market more quickly, than those in the countryside.
• The relatively bigger capital investments, particularly that of foreign in-
vestors, assisted in the more dynamic modernisation of the local economy in
Budapest.
• The continuing attractiveness of the local economy has stimulated its perma-
nent structural renewal.
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• The knowledge base, i.e. education and R&D, has traditionally had its centre
in Budapest (Table 8).
Table 8
R&D in Budapest, 1997
Budapest
Total
Number of research institutes
735
1679
Budapest-based (%)
43.8
100.0
Number of employees in R&D
21 166
39 626
Working in Budapest (%)
53.4
100.0
Re,searchers (%)
56.8
100.0
Expenditure on R&D (in million HUF)
36 584
57 184
In Budapest (%)
64.0
100.0
Number of research institutes per 10000 inhabitants
3.9
1.7
Number of researchers per 10000 inhabitants
67.2
21.7
Total expenditure on R&D per 10000 inhabitants
195.2
56.3
Source: Kozep-Magyarorszag (Middle Hungary). Regions in Hungary, I. KSH, 1998
As Table 8 shows, between half and two-thirds of Hungarian R&D is con-
centrated in Budapest. (The R&D institutes belonging to universities are located
geographically more evenly throughout the country than the independent R&D in-
stitutes). The higher significance of a knowledge base is a privilege of any core re-
gion and big cities in general, as is the case of Budapest as well. This contributes
to a potential dynamism of social-economic development and enhances the capa-
bilities for renewal.
In spite of the general tendencies described above, the decreasing R&D ca-
pacity, the low level of technological innovation, the impoverishment and deterio-
ration of higher education, the backwardness of the infrastructure in the knowledge
industry,. and the decreasing living standard of researchers and teachers character-
ise the knowledge base in Budapest as well. But these negative tendencies have
been less dramatic in the capital than in the rest of the country. In addition, foreign
investors, particularly the multinational companies, are beginning to discover Bu-
dapest as a potential location of their own R&D. During the past few years new
R&D centres have been founded in Budapest (GE, IBM, Ericsson, Knorr-Bremse,
Chinoin-Sanofi, Phylaxia-Sanofi, Nokia, etc.; Varszegi, 1998). There is no doubt
that Budapest will continue to maintain the largest concentration of R&D in Hun-
gary.
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2.2 Structural changes
2.2.1 Recession and restarting in the industrial production
The amplitude — both in recession and growth — was more limited in the industry
of Budapest than in the countryside. The production in the industry began to in-
crease two years later in Budapest, practically after 1995, than in the other regions
in Hungary (Table 9). All together, it is obvious, that from 1995 the industrial pro-
duction is continuously increasing even in Budapest, as well (Barta, 1999).
Table 9
Industrial production'
(index of volume, the previous year=100)
1991
1993
1995
1996
1997
19982
Budapest
80.5
98.4
100.0
101.1
105.6
105.1
Total
81.6
102.4
104.4
103.6
111.1
113.8
In enterprises employing more than 50 persons
2 First half of the year
Source: Budapest Statisztikai Evkonyve (Statistical Yearbook of Budapest) 1996, Statiszti-
kai Zsebkonyve (Statistical Pocketbook of Budapest), 1997, Budapest Statisztikai
TajekortatO (Statistical Bulletin of Budapest) 1998/2, Magyar Statisztikai Evkonyv
(Statistical Yearbook of Hungary) 1996, KSH Statisztikai Havi Kozlemenyek
(Monthly Bulletin of Statistics) 1998/6. KSH, Budapest
2.2.2 Changing industrial structure
• Industry in the economy of Budapest
It is not surprising that the number of those employed in the industrial and con-
struction sectors has been decreasing. On the other hand, it is worth taking into ac-
count that similar trends have dominated trade and tourism as well. Moreover, the
size of Budapest's active population has also continued to decrease. The industrial
labour force decreased by 44% and the construction labour force by 56% between
1992 and 1997, whereas the number of those employed in trade declined by 43%
and the active working population shrank by 26% during the same period.
The number of civil servants and government officials remained more or less
constant. Almost one quarter of Budapest's active population was employed in
various parts of the public administration (Table 10).
Among the enterprises trade and real estate sectors are dominating (more than
60%), in the structure of investments, particularly in foreign direct investments the
industry, construction, transport and telecommunication are the decisive elements
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(60-75%). It is interesting, that the decrease in the employment was the most inten-
sive in the latter mentioned sectors (which means, that one reason of the diminishing
employment was the drastic increase in productivity). (Table 11, cf. table 1).
Table 10
Changing employment structure in Budapest (%)
Sector
1992
1994
1996
1997
Manufacturing
20.5
16.6
15.2
14.8
Industry
22.3
18.8
17.4
16.9
Construction
5.2
4.1
3.4
3.1
Trade and tourism
13.6
10.5
11.2
11.2
Transport. telecom.
10.3
11.0
11.5
11.0
Finances
2.7
3.5
3.7
4.0
Real estate. insurance
7.3
5.9
6.7
7.0
Public administration
17.3
22.7
21.8
23.2
Education
7.3
8.9
9.1
8.2
Health
9.1
9.3
10.2
10.6
Other
4.9
5.3
5.0
4.8
Total
100.0
100.0
100.0
100.0
Source: Budapest statisztikai evkonyvei (Statistical Yearbook of Budapest) 1992, 1994, 1996,
1997, KSH, Budapest
Table 11
Sectoral structure of Budapest's economy, 1996 (%)
Sectors
Enterprises'
Investment
FDI
GDP2
Agriculture
0.8
0.2
0.0
0.5
Industry
12.2
19.9
24.0
18.3
Construction
7.3
10.1
16.9
4.3
Trade
29.8
9.3
10.6
n.a.
Tourism
3.1
1.6
2.0
n.a.
Transport/Telecom.
6.2
30.5
34.0
n.a.
Finance
0.4
7.0
9.6
n.a.
Real estate sector
31.1
7.1
2.8
n.a.
Public administ.
0.0
4.0
0.0
n.a.
Education
0.6
3.4
0.0
n.a.
Health service
1.3
2.7
0.0
n.a.
Other
7.2
4.2
0.1
n.a.
Total
100.0
100.0
100.0
100.0
I Active enterprises, 2 1995
Source: Budapest Statisztikai Evkonyve (Statistical Yearbook of Budapest) 1996, 1997
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The size structure of Budapest's enterprises is determined basically by the
national economic changes. In the first years of the transitional period the larger
proportion of small enterprises was a characteristic compared with the size
structure of the national economy, due to the quicker transformation (from the
central planned economy to the market economy) in the economy of Budapest,
than in countryside. Later, the regional differences in size structure have become
equal. (Table 12; B arta, Beluszky, 1999).
Table 12
Changing size structure of enterprises (%)
Categories
1991 1
19931
1996 2
(persons)
Budapest
Total
Budapest
Total
Budapest
Total
- 20
79.0
72.5
87.1
81.7
93.1
89.0
21- 50
11.7
12.2
7.4
9.1
4.0
5.9
51-300
6.6
10.6
4.2
7.2
2.3
4.2
301-
2.7
4.7
1.3
2.0
0.6
0.9
Total
100.0
100.0
100.0
100.0
100.0
100.0
'Economic enterprises with legal entity,
2 Active economic enterprises with legal entity
Source: Magyar Statisztikai Evkonyvek (Statistical Yearbook of Hungary); Budapesti Sta-
tisztikai Evkonyvek (Statistical Yearbook of Budapest), KSH, Budapest
The economic enterprise structure is continuously breaking up into smaller
parts., This means the decrease of the medium and big enterprises, and the increase
of small enterprises. At the same time the beginnings of an organisational concen-
tration can be recognised in the category of small enterprises at the expense of the
micro-size enterprises (less than 10 persons). Nevertheless, the Hungarian organ-
isational structure by size doesn't differ essentially from that of the EU countries.
In Hungary the proportion of the micro-size enterprises is higher, and that of the
bigger size (10-49 employees) enterprises is smaller, than in the EU. It may be
added that even the micro-size category may be more limited in Hungary, too, but
a few activities (for example, to offer a flat for rent, to be an agent, etc.) can be
done legally, or more advantageously from a taxation point of view, only in the
framework of an enterprises (Table 13).
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Table 13
Enterprise size structure in the EU, Hungary and Budapest, 1996 (%)
Size
EU
Hungary
Budapest
Micro
92.5
96.5
96.3
Small
6.3
1.5
1.7
Together
98.8
98.0
98.0
Medium
1.0
1.8
1.8
Big
0.2
0.2
0.2
Total
100.0
100.0
100.0
Source: Observatory (1996) p. 49 In: Roman, Z., 1998, Peterdy, V., 1998, p. 9, Budapest
Statisztikai Evkonyve (Statistical Yearbook of Budapest), 1996
Industrial structure in Budapest
In the structure of Budapest's industrial production, first of all the machinery sec-
tor, and, to some small extent, the food industry and metallurgy have increased,
while, that of the textile, wood, paper, printing industry and the chemistry have de-
clined.
All together three branches create around 70% of the industrial production of
Budapest: food industry, machinery, and first of all, chemistry.
The main difference in the branch-structure of the industry between Budapest
and Hungary as a whole is the distinguished role of chemistry in the capital's in-
dustry (Table 14).
Table 14
Changing structure in the production and employment of industry (%)
Sector
Production
Employment
Budapest
Budapest
Total
Budapest
Budapest
1993
1997
1997
1993
1996
Manufacturing
87.3
87.4
87.2
90.1
87.3
- Food ind.
12.6
14.1
18.8
10.6
9.1
- Textile
4.5
2.9
3.9
10.8
8.5
- Paper, printing
7.4
6.0
5.1
11.2
10.9
- Metallurgy
4.3
4.4
8.7
9.1
9.3
- Machinery
19.0
22.7
29.3
29.2
26.2
- Chemistry
36.6
35.2
17.5
13.8
18.0
Total
100.0
100.0
100.0
100.0
100.0
Source: Budapest Statisztikai Zsebkonyve (Statistical Yearbook of Budapest 1993, 1997,
Budapesti Statisztikai Tajekortato 1998/2, KSH Statisztikai Evkonyvek (Statistical
Yearbooks by KSH).
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The share of manufacturing in the national industry — except of the food in-
dustry — is decreasing both in production volume and export. But, it has to be em-
phasised that in 1997 about 50% of the national production and export of the
chemistry industry and 25-30% of the wood, paper and printing industries came
from Budapest's industry. In the national industrial production, about 20-30%, and
in the national industrial export 15-25% were the contributions of Budapest's
food, textile and machinery industries
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3 Future development of the industry
3.1 Economic concentration and central functions
• In the long run, the Budapest agglomeration is going to remain the most im-
portant economic concentration of the country and one of the most important
in Central Europe.
The Budapest agglomeration provides 900-950 000 jobs at present. Forecasts
predict that in the coming decade this job market will expand further, even in ab-
solute terms. This will amount to a 5-10% increase in the number of those em-
ployed in Budapest. An even more intensive growth, about 10-15%, can be ex-
pected in the agglomeration itself. The increase in the number of white-collar and
academic jobs is likely to exceed the average increase of employment rates (i.e. an
increase of approximately 20% is expected in these areas; M. Z. Petchnig, 1997; T.
Matolcsy, 1998; Regional Development Masterplan of the Budapest Agglomera-
tion Development Council [BAFT], 1999).
In other words, demand for labour will increase while population figures will
continue to fall in Budapest and stagnate in the agglomeration. This implies that
the Budapest agglomeration is going to recruit more and more members of its la-
bour force from surrounding regions. The higher economic performance of this
region can be expected to lead to increasing migration and commuting as well as a
growing presence of foreign labour.
As in the case of Western European metropolises, Budapest is going to see the
emergence of a split labour market. Demand for highly-qualified labour will in-
crease on the one hand, and so will the need for unqualified labour performing
various (frequently illegal) personal services, on the other. This dual labour market
can be expected to prevail primarily in sectors dominated by foreign investors.
• The economy of the Budapest agglomeration has been hitherto subject to an
extremely rapid modernisation process. This tendency is likely to continue,
though probably at a somewhat slower pace than before.
Recent years have seen a significant shift in the division of labour between
manufacturing and services sectors in Budapest — from a 40-60% division to a
present 20-80% in favour of services. The share of manufacturing is certainly go-
ing to remain higher in the agglomeration belt than in the capital. Receding agri-
cultural activities and extending services will also lead, however, to a shift in fa-
vour of the tertiary sector in the agglomeration. Material services (trade and fi-
nances as well as high-value-adding, top-end business services) are going to be
primarily responsible for growth in the tertiary sector both in Budapest and the ag-
glomeration.
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A tightly-knit network of economic connections will develop between eco-
nomic sectors and companies. Subcontracting small and medium-sized enterprises
associated with various large companies are going to emerge. The division of la-
bour between Budapest and the agglomeration will take on a definite shape with
characteristic sectorial differences. On the whole, the distance between place of
residence and place of work will increase (but the difference between the number
of people commuting into the city and out of the city will be smaller than in previ-
ous years). The division of labour between company headquarters and manufac-
turing plantsis likely to remain unchanged (headquarters mostly remaining in Bu-
dapest).
The emergence of new industrial zones can be predicted. They will develop ac-
cording to a complex system of vertical and horizontal divisions of labour. These
divisions of labour will primarily affect, among others, the nature of relations be-
tween large and multinational companies and their subcontractors in the food and
chemical industries and between co-operating small and medium-sized enterprises
in the paper and printing industries.
• Budapest will assume the increasingly important role of a knowledge base.
Knowledge represented as human capital, i.e. as a human resource and technol-
ogy, is going to play a key role in sustaining future economic growth. The high
concentration of scientific-academic knowledge and technological know-how can
foster the development of the Budapest agglomeration in important ways, as lead-
ing sectors of the knowledge-industry are going to stimulate growth in other areas
as well. Such leading sectors include higher education, special training for highly
specific economic needs, the concentration of research centres and the informa-
tion-technology industry as well as the entire infrastructure serving these activities
(technological parks, advanced telecommunications technologies, top-end business
services, etc).
Knowledge-base concentration in the capital is hardly a recent development,
although it must be said that the last decade has seen a considerable evening-out of
spatial discrepancies in this field (the percentage of academic staff and students at
the capital's higher educational institutions now corresponds approximately to Bu-
dapest's share in the national population). New higher educational institutions
have been founded in the Budapest agglomeration (including the newly founded
Catholic University at Piliscsaba) and already existing colleges and universities lo-
cated in various towns of the 60-70 km wide belt around Budapest have become
more active (for instance, the Agricultural College of Godollo which has been de-
veloped into a national educational institution).
The lack of close connections between the various institutions of the capital's
knowledge base is certainly the greatest obstacle at present. This explains why
synergies between these institutions still cannot be realised sufficiently. Unsatis-
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factory co-operation is no doubt to a great extent to be attributed to a number of
historical, financial and organisational reasons. The key reason, however, is cer-
tainly the lack of demand on behalf of new enterprises, including Budapest-based
investments of multinational companies, for a highly-qualified knowledge base.
Progress made in this area thus far has been small. The Budapest INFOPARK is in
fact the first Hungarian technological park based on a co-operation of high-
technology multinational companies and universities (Kovacs, 1998).
• Economic growth must be generated by the sustained performance of in-
vestment activities
There is no reason to expect foreign direct investment to lose interest in Buda-
pest with the end of the privatisation process. On the contrary, current tendencies
providence ample evidence of already existing enterprises attracting new invest-
ments. Foreign ownership has been growing in joint-ventures. New investments
contribute to the modernisation and growth of companies already in full foreign
ownership. It can be concluded therefore that Budapest's outstanding potential for
attracting capital has not decreased in the last ten years. For instance, in the tele-
communications, information-technology and software sectors investors continue
to show a distinct preference for Budapest. Such multinationals as IBM and Nokia
have already started establishing their own R&D centres in the capital. A diverse
labour market offering a highly-skilled and relatively cheap labour force is going
to remain a long-term incentive. Surveys unanimously predict that large-scale in-
vestments of Budapest-based companies are invariably going to exceed national
figures between 1998 and 2002 (73% of the largest exporting companies located in
Budapest plan to make investments of over 500m HUF by 2002, whereas the same
figure is only 40% nation-wide).
The agglomeration zone on the other hand is better suited for greenfield in-
vestments (including shopping centres, discount stores, offices, warehouses, logis-
tical bases in the commercial and real estate sectors and the construction of new
hotels in the tourism industry). The attention of foreign investors is likely to ex-
tend towards less frequented areas of the agglomeration as well. Governmental in-
vestments have primarily focused on the agglomeration belt (plans already ap-
proved of include the completion of the MO-motorway ring around the capital and
the construction of a new sewage-treatment plant). It is also expected that the de-
velopment and investment activities of domestic and foreign investors will become
more diversified. Finally, further EU funds will probably become accessible in the
course of Hungary's access to the European Union (Fazakas, Deak, 1998)
The future growth of the economy of the Budapest agglomeration will in all
likelihood exceed the national average. First, it is to note that foreign direct in-
vestments concentrated in Budapest are generally more productive than domestic
enterprises. Second, the structural transformation of the economy of the Budapest
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agglomeration is going to stimulate a more dynamic economic growth. As already
mentioned, this transformation leads to a shift in favour of market services in Bu-
dapest. Precisely this sector, which has at present already a 60% share in the capi-
tal's economy, is predicted to achieve a growth rate above that of the GDP.
• Economic concentration, a significant knowledge base and dynamic in-
vestments will lead to the emergence of a complex and characteristically-
structured local economy. They are also going to result in the strengthening
of the central economic functions of the capital.
The Budapest agglomeration will continue to play a central role in exports as
well as in the domestic wholesale and retail trade. The capital's central trading
functions will also be extended to the agglomeration belt due to the construction of
shopping centres and department-store chains and the enhancement of logistical
functions. Retail businesses of the agglomeration are going to continue to attract
shopping tourism from surrounding countries in the next few years as motorway
construction projects are being realised. The process of capital concentration will
probably continue in this sector, further mergers are expected (especially in the
food retail sector, e.g. the acquisition of the Julius Meinl delicatessen chain by
Belgian Profi). Chains are going to become prevalent, the market share of small
retail shops and family enterprises will fall even in smaller settlements.
The development of the financial sector is going to continue. At the same time,
its spatial concentration will remain strong. In other words, Budapest is going to
stay the exclusive centre of financial services. This involves the concentration and
centralisation of banks and insurance companies. Meanwhile, their services will
become more accessible and regionally distributed as branches and outlets will be-
come more numercus, perhaps also using existing channels such as post offices.
Budapest is the exclusive centre of the Hungarian administration. At present,
every fourth active member of the capital's population is employed in the civil
service. Their numbers are not going to increase with the growth of the labour
market. Nevertheless, despite a slightly smaller share, the State administration will
continue to play a decisive role in Budapest's economy and labour market.
Manufacturing will be increasingly relocated from the capital to the ag-
glomeration ring (and the countryside). However, Budapest's industry will remain
the largest industrial concentration in the country. On the whole, it can be said
that the capital's industry has been subject to a thorough transformation in terms of
sectorial, employment, ownership, regional and company-size structures. Its tech-
nological standards will increase radically, productivity, efficiency and profitabil-
ity figures significantly exceeding the national average.
The capital's once prosperous tourism sector has been experiencing a fairly
deep recession in recent years, despite some continuing success in congress tour-
ism which keeps attracting foreign organisers. The agglomeration ring itself has
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Discussion Papers, No. 30.
never attracted any large number of tourists. The fact that much-needed invest-
ments have not been realised in this sector is not only to be attributed to capital
shortage. Both the central administration and local governments have failed to rec-
ognise the potential inherent in the tourism industry. Private investment has also
remained insufficient. International trends indicate, however, important changes in
this sector. The role of culturally diverse metropolises has once again become
more significant. In other words, the present development of international demand
in tourism and the distinctive attractions of the Hungarian capital could promis-
ingly converge in the future.
Agriculture is going to be pushed back to a more and more marginal function
in the Budapest agglomeration. The acreage of land used for agricultural purposes
has been steadily decreasing. Only in the southern sector of the agglomeration will
agriculture remain an important factor (this is a traditional agricultural area). For-
est plantations and re-grassing take up the largest areas among planned conver-
sions of land formerly used for agricultural purposes. These developments are im-
portant to reduce devaluation damages and are necessary to make Hungary's agri-
culture EU-compatible. In addition, they help to close the green belt around the
capital.
3.2 Future industrial changes
In the 1990s, industrial development has been based mostly on foreign direct in-
vestment, particularly on the investments of multinational companies. This devel-
opment has been highly dynamic, though not free of conflicts. The main reason for
these tensions is to be sought in the fact that foreign investments could not suffi-
ciently integrate domestic industrial potential, or conversely, that domestic indus-
try has been incapable of co-operating with foreign enterprises. Products that could
not be obtained at the domestic market had to be imported which in turn resulted in
dangerous budget and balance of trade deficits. In addition, the entire industry has
basically been split into two separate divisions: foreign companies versus those in
domestic ownership, export-oriented foreign enterprises versus those producing for
the domestic market, an export-oriented machinery industry versus sectors pro-
ducing non-exportable goods, dynamic industrial regions versus those suffering the
repercussions of industrial recession (Schweitzer, I., 1998).
The optimistic scenario concerning the future of the Hungarian economy as-
sumes above-average industrial growth which in turn depends on steady export
performance, growing domestic consumption, integration of the industries in for-
eign and domestic ownership. According to this scenario, the industry of the Bu-
dapest agglomeration will be characterised by growth and structural transformation
in the following 4-5 years.
45
Barta, Györgyi: Industrial Restructuring in the Budapest Agglomeration.
Pécs: Centre for Regional Studies, 1999. 53 p.
Discussion Papers, No. 30.
• Growing production
The growth of Budapest's industry will be more or less equal to the growth of
the national GDP. This implies a 4-5% yearly growth rate in the medium-run for
industrial sectors in the capital. This will be much less than the overall rate of do-
mestic industrial growth (about 10-12%). At the same time, according to this pre-
diction, industrial sectors will maintain or even improve their positions within Bu-
dapest's economy.
• Transformation of sectorial structure
A faster growth of certain industrial sectors can be expected in Budapest (in
particular in telecommunications, electronics, information technology, paper-
manufacturing, printing and pharmaceuticals). In this respect Budapest will prove
no exception to general forecasts for the domestic economy, although expansion of
these industrial sectors in the capital will fall short of the national average. Indus-
trial growth figures are going to be improved by industrial investments in the ag-
glomeration ring (Table 15):
Table 15
Medium-term forecast for Budapest's industry, 1999-2002
(production volume, previous year = 100)
Sector
1999
2000
2001
2002
Industry (total)
105
105
104
105
Food
102
103
100
103
Textile, clothing
98
100
96
100
Paper, printing
105
105
102
108
Chemical
100
102
100
102
Metallurgy
100
100
100
100
Machine
112
110
105
110
Electricity
105
105
104
105
Industry:
— domestic market
107
107
101
104
—exports
110
110
110
110
Source: I. Schweitzer: Medium-run forecast for Budapest's industry (1998-2002). Kopint-
Datorg Rt., Budapest, 1998, p. 65.
The expected above-average growth of the construction industry is also to be
noted. This will amount to a yearly growth of 10-12% in Budapest.
46
Barta, Györgyi: Industrial Restructuring in the Budapest Agglomeration.
Pécs: Centre for Regional Studies, 1999. 53 p.
Discussion Papers, No. 30.
• Transformation of company size-structure
Further capital concentration is expected in the energy sector and the food in-
dustry.
The optimistic scenario expects a rapid development of domestic small and
medium-sized enterprises. Despite considerable fluctuation, the overall number of
new enterprises launched will multiply rapidly. Small and medium-sized enter-
prises will be increasingly able to become subcontractors of foreign multinationals
(especially in the chemical, food and machinery industries). On the other hand, the
co-operation of small and medium-sized enterprises in the wood, paper and print-
ing industries as well as in the machine industry will create new industrial districts
in the Budapest agglomeration.
• Employment forecasts in the industrial sector
It follows from the foreseeable decrease of Budapest's population and the cor-
responding stagnation of the population in the agglomeration that the active popu-
lation of the Budapest agglomeration will diminish. Economic prosperity will lead
on the other hand to growing demand on the labour market. Thus commuting and
the influx of legal and illegal foreign labour will both become more significant. At
the same time, because of increases in productivity, labour demand in the indus-
trial sector will probably continue to fall, even if at a diminishing rate. It is esti-
mated that there will be 20 to 25 thousand fewer jobs in Budapest's industry by
2005. Only the construction industry can be expected to offer more jobs in Buda-
pest. Industrial investments in the agglomeration will create new industrial em-
ployment possibilities to some extent.
• Spatial changes in the location of industry
Industrial differences between large regions are likely to increase further. The
central and northwestern regions of the country will monopolise production to an
ever increasing extent. In addition, industrial centres may exert their influence over
larger and larger parts of the surrounding areas. Not only will Budapest's agglom-
eration be linked more closely to the centre, but dynamic industrial centres (such
as Szekesfehervar, Esztergom, Tatabanya and Dunatijvaros) in Budapest's vicinity
will also be increasingly become associated with each other, thus contributing to
the emergence of a contingent industrial region.
Two-thirds of greenfield investments with foreign capital have been carried out
in Northern Transdanubia (lying close to the Austrian border) and another 20-25%
in the Western part of the Budapest agglomeration. This significant industrial ca-
pacity is going to produce with increasing intensity in the near future. It is con-
ceivable that a single large industrial region will emerge between Hungary's West-
ern border and the capital. This industrial region is going to be united by an infra-
structural network and a common job market. The development of industrial con-
47
Barta, Györgyi: Industrial Restructuring in the Budapest Agglomeration.
Pécs: Centre for Regional Studies, 1999. 53 p.
Discussion Papers, No. 30.
nections can also be expected, since many companies belong to the same sector
(car industry and other areas of the machinery industry). Subcontracting networks
will become increasingly interlinked. There is little doubt that only this region
stands a chance of becoming a high-tech production area in Hungary (Gy. Barta,
1998, P. Tunas, 1995).
3.3
Industrial, technological and scientific parks
Industrial parks are enterprises that provide infrastructure and services in order to
attract other enterprises (mostly small and medium-sized enterprises) to settle in
the park. The idea of industrial parks was originally conceived as a form of real
estate investment. Later industrial parks were developed that could fulfil various
additional functions. They enhance innovation and structural transformations,
make the practical application of R&D results possible, allow companies settling
in the park to develop various joint-ventures with each other, act as an 'incubator'
for newly-launched enterprises and participate in regional development pro-
grammes for peripheral territories. In the course of time, different types of parks
have evolved, including scientific parks, technological parks, innovation centres
and commercial parks, etc. (Benko, 1992).
• Industrial parks in Budapest
At the outset, industrial parks were established through local initiatives (enter-
prises of local governments or companies). The first Hungarian industrial parks, in
the beginning of the 1990s in Gyor and Szekesfehervar, were also created by such
entrepreneurial associations. Industrial parks, however, began to be established in
large numbers after governmental funding had been made available for such proj-
ects (Ipari parkok, 1998).
Settlements and enterprises first have to apply for the right to call their de-
velopment projects 'industrial park'. Only in possession of this title are they then
allowed to submit an application for governmental funding. There are 75 industrial
parks officially registered in Hungary at present, but only two dozens of them have
actually been able to attract new investments.
There are two official industrial parks in Budapest (i.e. with an officially reg-
istered title):
The Industrial Park of North Pest has been conceived to foster the development
of Kaposztasmegyer (III'l district). This park is not yet active. It is to further the
creation of jobs, industrial transformation and urbanisation. It is hoped that many
potential subcontractors of multinational companies in Ojpest (W' district) will
opt to utilise this park.
48
Barta, Györgyi: Industrial Restructuring in the Budapest Agglomeration.
Pécs: Centre for Regional Studies, 1999. 53 p.
Discussion Papers, No. 30.
The ECO Industrial Park is being planned in an area in joint ownership of
Pestszentlorinc (XVffl district) and Vecses. The park is to settle on the premises
of the former Soviet military barracks. Given the geographically advantageous lo-
cation of this area (proximity of motorways and airports), various logistical func-
tion could be sited here. The area is temporarily being used for other purposes. Un-
fortunately, the development of this industrial park is now being jeopardised by
political differences between the two local governments involved.
•
Technological parks
The decision to create the first technological park proper was passed by the gov-
ernment in May 1996. As a consequenece, the Informational and Technological
Innovation Park (short: Infopark) was established on a 0.021km 2 large area. (This
area had been formerly designated to accommodate the World Exhibition in 1996,
but Hungary's application was later withdrawn.) The owners of the Infopark are
the University of Budapest (ELTE) and the Polytechnic of Budapest (BME) jointly
holding 25%, the National Technological Development Commission (OMFB),
holding 25%, the Hungarian Development Bank with 49% and the Ministry of
Economy with holding a 1% 'golden' share (Grof, 1999).
Originally, the building of 150 000 m 2 of office space was planned on both the
northern and southern parts of the Infopark. These offices were to be leased to
multinational, information-technology and telecommunications companies. The
chief aim in creating the Infopark was to establish a co-operation between the two
participating universities, on the one hand, and companies leasing the offices, on
the other. The planned co-operation offers various advantages:
• Assuring state-of-the-art R&D activities. (An 'incubator-house' located in
the park is to make it possible for small and medium-sized enterprises as well
as for the two universities to participate more actively in research and devel-
opment. Enterprises settling in the park belong to leading industrial sectors
that exert a considerable influence on other areas of the Hungarian economy
as well). The Infopark is intended to contribute to fostering the 'informa-
tional society' by housing multi-media educational institutions and enter-
prises.
• R&D activities of the Infopark can be taken up by industrial parks to produce
new kinds of products (technological parks do not engage in production and
marketing themselves).
• The Infopark can create jobs for highly qualified experts (for instance, the
IBM research centre is to employ about 400 people).
• Significant foreign and domestic non-governmental sources have signalled
their willingness to participate in running the Infopark. This will improve re-
search opportunities for the universities involved. A German investor already
49
Barta, Györgyi: Industrial Restructuring in the Budapest Agglomeration.
Pécs: Centre for Regional Studies, 1999. 53 p.
Discussion Papers, No. 30.
donated, for example, 1 million DM (US$ 535 million or A 511 million) to
the Infopark Foundation, but even greater amounts will be brought in by
some other foreign investors).
• The Infopark will significantly contribute to re-enforcing the central function
of the capital in the region.
The realisation of these priorities has reached the following stage by now:
• An environmental rehabilitiation project has been started. (The actual area of
the Infopark is at the location of the former Lagymanyos-lake that has been
filled up by various waste materials in the course of the last decades).
• The construction of the IBM building was started in the beginning of 1998.
The building can be occupied by the company at the end of August-
September 1999.
• The accessibility of the Infopark by means of public transport is still un-
resolved (the fourth subway line, a new tram line on the Lagymanyos-bridge
and the extension of the no. 19 tram-line cannot be carried out in the short-
run).
• Despite considerable efforts to this end, the Infopark could not persuade
Nokia to move its research centre to the park (the main reason being that
they could not satisfy Nokias demand for parking places; in addition, Nokia
was not willing to await the end of the much delayed building construction).
• The Infopark established a joint venture with the German 1VG/DeTe group
(this entrepreneurial group donated the above mentioned 1 million DM to the
Infopark Foundation). This group is responsible for the construction of the
MATAV (Hungarian telephone company) building as well as the central
building of the Park which is to include the incubator-house as well. The
construction of the MATAV building was started at the end of 1998, it is
going to be opened around mid-2000.
Thus it can be said that investments launched at the Infopark have a promising
future, even though the park is not operative yet. The co-operation between the
two universities, the University of Budapest and the Polytechnic of Budapest, has
also had a positive start on the university premises at the park. After the comple-
tion of the other investments within the next two or three years, the Infopark is
certainly going to play an important role in Hungarian research and development
(especially due to its modern office infrastructure).
•
Other technological parks
It is important to mention that other technological parks are already operative in
Budapest, even if the activities of these do not meet the standard definition of a
technological park in every respect. One example is provided by INNOTECH, a
10-year-old project under the auspices of the Polytechnic of Budapest. The park,
50
Barta, Györgyi: Industrial Restructuring in the Budapest Agglomeration.
Pécs: Centre for Regional Studies, 1999. 53 p.
Discussion Papers, No. 30.
the operation of which has already become moderately profitable, is 9000m 2 large.
Enterprises located here employ approximately 150 people.
The Graphisoft Park is an even more important example. Its construction was
begun on the Obuda Island in 1996 when Graphisoft purchased a 70 000m 2 large
part of the premises of the former gasworks from Budapest's Local Government.
This park accommodates various software-companies. More than 20 000 m 2 of of-
fices are planned in the Graphisoft Park to be surrounded by a park with sports fa-
cilities and restaurants. The renovated building of the gasworks is going to house
an industrial museum.
No similar technological parks operate outside Budapest. At the same time, a
number of interesting plans have been already formulated, particularly in associa-
tion with various universities.
Budapest, a future technopolis?
It is likely that the completion of the Infopark will adequately meet demands for
technological parks in Budapest. The XP district will be enjoying a privileged po-
sition with two universities, several research institutes and the Infopark itself. Such
concentration of knowledge may also lay the groundwork for the creation of a fu-
ture technopolis. This could offer prospects for abandoned and dilapidated indus-
trial plants in the vicinity, most of which are advantageously situated along
motorways leading out of the city. Technological parks are not well suited for car-
rying out the experimental phase of R&D activities and even less for industrial
production, logistics and marketing. These functions could be taken over by in-
dustrial plants now in disuse.
51
Barta, Györgyi: Industrial Restructuring in the Budapest Agglomeration.
Pécs: Centre for Regional Studies, 1999. 53 p.
Discussion Papers, No. 30.
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Discussion Papers 1999. No. 30.
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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., Tam& (1987): Investigations of Social Infrastructure in Rural
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, Laszlo — HRUBI, Laszlo (1988): Development Possibilities of
Backward Areas in Hungary
No. 8 SZORENYINE KUKORELLI, ken (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 Technology in
Hungary
No. 11 SIKOS T., Tam& (1992): Types of Social Infrastructure in Hungary (to be not
published)
No. 12 HORVATH, Gyula — HRUBI, Laszlo (1992): Restructuring and Regional
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 HAJDO, 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 Sociologist
No. 19 HRUBI, L. — KRAFTNE SOMOGYI, Gabriella (eds.) (1994): Small and
Medium-sized Firms and the Role of Private Industry in Hungary
Discussion Papers 1999. No. 30.
Industrial Restructuring in the Budapest Agglomeration
No. 20 BENKONE Lodner, Dorottya (1995): The Legal-Administrative
Questions of Environmental Protection in the Republic of Hungary
No. 21 ENYEDI, Gyorgy (1998): Transformation in Central European
Postsocialist Cities
No. 22 HAJDU, Zoltan (1998): Changes in the Politico-Geographical
Position
of Hungary in the 20th Century
No. 23 HORVATH, Gyula (1998): Regional and Cohesion Policy in Hungary
No. 24 BUDAY-SANTHA, Attila (1998): Sustainable Agricultural Development
in the Region of the Lake Balaton
No. 25 LADOS, Mihaly (1998): Future Perspective for Local Government
Finance in Hungary
No. 26 NAGY, Erika (1999): Fall and Revival of City Centre Retailing: Planning
an Urban Function in Leicester, Britain
No. 27 BELUSZKY, Pal (1999): The Hungarian Urban Network at the End of the
Second Millennium
No. 28 RACZ, Lajos (1999): Climate History of Hungary Since the 16 th Century:
Past, Present and Future
No 29 RAVE, Simone (1999): Regional development in Hungary and Its
Preparation for the Structural Funds