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NEMETHY: Comparing the SME Sector of Hungary With the Visegrad Four and EU

Small and medium-sized enterprises (SMEs) are the main generators of wealth and employment in the vast majority of countries. Hence any government should carefully monitor their performance and do everything possible to create a supportive environment for them.    

This article first looks at the statistics on SME performance in the Visegrad Four (V4) lagging the European Union (EU), then discusses potential causes for lags, and the special case of Hungary.

SME performance in the European Union and Visegrad Four

SMEs employed approximately 84.6mn people in the EU, which accounted for approximately two thirds of Europe-wide employment. Of these, approximately 38mn were employed in micro-enterprises (0-9 employees), some 26mn in small enterprise (10-49 employees) and 21mn in medium enterprises (50-249 employees, as per the EU’s definitions). To qualify as an SME in the EU, an enterprise must also have less than €250mn revenues.

According to economist Zoltan Pogatsa, EU-wide SMEs accounted for approximately 58% of GDP in 2018. Most V4 countries lagged the EU average by 10-15%: Slovakia (48% of GDP), Czech Republic (43%) and Poland (37%). In Hungary, SMEs accounted for a mere 25% of GDP.

A measure of productivity is Value Added per Person, measured by dividing gross value added by number of employees:

Exhibit 1: Value Added per Employee in Selected Countries (2018, in EUR)

 GermanyCzechiaSlovakiaPolandHungary
Micro58,353.640,804.425,791.429818.2036217.00
Small61,413.253,693.450,718.159,507.253,896.9
Medium77,240.667,310.456,910.269,048.763,141.4

As can be seen above, there is a 10-20% lag in V4 countries compared to Germany.  Here Slovakia scores the lowest, Hungary is in second lowest position.

Reasons for SME lag

While it is difficult to estimate the precise effect of each of the following possible explanatory variables for SME lag in the Visegrad Four compared to the more advanced EU countries, it is likely that the following factors play a role (not in order of importance):

  • Less conducive legal and regulatory environment.
  • Less access to capital markets, both debt and equity; also more difficult to access to bank financing.  Equity constitutes a higher percentage of the financing mix in the V4,  slowing expansion.
  • Labour prices in the Visegrad Four countries have been rising, while educational standards have been lagging.
  • There may also be difference in the calibre of management and entrepreneurship (which ties in with the calibre of the educational system).
  • Higher levels of corruption

Hungary is a special case: it has the highest rate of GDP share provided by multinationals, and also a very significant share of enterprises known in Hungarian by the NER (an acronym for companies owned by government cronies). The multinationals (whose greenfield operations are often heavily subsidised by the government) and the NER (who often have preferential access to credit, particularly from government–owned banks), may very well be squeezing out SMEs.   

Finally, it should be mentioned that in Hungary the NER have a habit of buying out locally owned SMEs, sometimes at market price, sometimes with not-so legitimate tactics. When such an enterprise is absorbed into the business empire of an oligarch, it no longer qualifies as an SME (as the EU definition of <250 employees also includes associated companies).

Between 2022 and 2023, Hungary’s rank fell from 39th to 46th place, out of 64 countries ranked by the Institute for Management Development (IMD) world competitiveness ranking. This is a dramatic fall for one year. In a recent article, Dr. Peter Akos Bod, university professor and former head of the Hungarian Central Bank, wrote:  “…productivity in the export-oriented multinationals is exceptional, whereas productivity in SME’s over the past decade or two has not improved.” (author’s translation).  

I can say that for the past twenty five years I have been regularly visiting SMEs in the Visegrad Four, and anecdotally I can confirm that SMEs in Hungary are typically less robust than their analogs in the other three Visegrad Four. There seem to be more factors that deter investors, more problems uncovered on due diligence, etc. Very few even have a written strategy document.

Governments across the Visegrad Four and indeed the EU should be paying more attention to SMEs and ensuring their prosperity, for they are indeed the geese that lay the golden egg, creating the wealth that underpins our standard of living. 

The exceptionally low share of GDP generated by SMEs in Hungary (ca. 25% of GDP) should set alarm bells ringing. This has the potential to stunt the development of the Hungarian economy and standards of living, as well as income distribution for the long-term. SMEs are like the canary in the mineshaft, a harbinger of bigger problems to come

Source : BNE Intellinews

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