Hungary: The Silicon Valley of Eastern Europe?

From...

March 17, 2000
Web posted at: 8:21 a.m. EST (1321 GMT)

by James Niccolai

(IDG) -- Ask most people to compile a list of the world's top high-tech regions and the chances are Hungary won't come up very often. But the former Soviet bloc nation is trying to change all that.

Last week, Hungary sent a delegation of high-level government and industry officials to Silicon Valley with the goal of persuading IT firms here to set up operations in their country.

"Hungary would like to become the Silicon Valley of Central Eastern Europe," said Csaba Kilin, director of investment with Hungary's Investment and Trade Development Agency, in a telephone interview last week.

Kilin and four other delegates, including a managing director of Hungary's national bank and a former government minister, visited high-tech firms up and down Silicon Valley last week, trying to persuade them to set up R&D (research and development) or manufacturing operations in Hungary. The Hungarian delegates wouldn't disclose who they met with, saying that talks are still in progress.

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The delegates told their Silicon Valley hosts that Hungary has a surplus of skilled programmers and engineers who will work for as little as one-eighth of the salaries demanded by their U.S. counterparts.

Other benefits, the delegates said, include a supply of affordable housing, a regulatory environment that is kind to outside investors, and a central location from which U.S. firms can expand into the rest of Eastern Europe.

"We have a stable and fast-growing economy that provides competitive advantages for firms who move there," said Attila Chakin, a former Hungarian minister, who now serves as economic advisor to Hungary's prime minister, and who was also part of the delegation. "Our goal is to bring more value-added production to Hungary."

According to Kilin, Hungary has already attracted investments from many of the world's top high-tech firms. Motorola said recently that it will set up an R&D facility there with about 400 engineers, he said, while Nokia has announced plans to open a similar facility that will house 500 R&D staff. Many of those R&D jobs will be filled by Hungarians, he added.

"Hungarian engineers and mathematicians are known worldwide," Chakin said. One of the country's better-known talent exports is John Von Neumann, a mathematician who helped pioneer modern computers and also developed Game Theory, a branch of math and logic that examines how parties with opposing interests interact during a conflict.

Hungary is also proving popular as a manufacturing outpost, Chakin said. General Electric employs 10,000 workers in Hungary, while industrial services giant Flextronics International operates three industrial parks there where contractors manufactures printers for Hewlett-Packard and routers for Cisco Systems, he added.

Richard Pfaffstaller, chief financial officer of Flextronics International Central Europe, was also in the delegation touring the Valley last week. Flextronics wants to attract more IT firms to fill its industrial parks in Hungary, he said.

The delegation also visited Detroit at the start of last week for a big auto show. Hungary is interested in attracting auto makers as well as high-tech and other electronics firms, Chakin said.

To achieve its goals, the former Eastern bloc nation will need to convince investors that it has recovered from almost a half century of highly centralized rule. Like most of its neighbors, Hungary became part of the Soviet bloc after World War II and enacted a program of nationalization and industrialization based on the Soviet model. Democracy returned to Hungary in 1989, and the country is now a strong proponent of the free market system.

Chakin said the country's transport and communications infrastructure have improved greatly over the past decade, adding that the differences between Hungary and its neighboring countries to the West have been exaggerated.

"The Hungarian economy is very dynamic and the differences are disappearing fast," the former minister said. Eighty percent of the formerly state-owned companies in Hungary have been privatized and 85 percent of Hungary's GDP (gross domestic product) is produced by firms in the private sector, he said.

Hungary will also need to fend off competition from Poland and the Czech Republic, who are also working hard to establish their countries as the high-tech capitals of Central and Eastern Europe.

Elsewhere in the world, the competition is also fierce. By coincidence, delegations from both Singapore and China were also travelling up and down Silicon Valley last week, trying to attract investments and IT startups.

"There is competition worldwide for foreign capital," Kilin said. "Most countries realize that these (high-tech) industries are growing fast and looking to expand in other markets."

In a report on Hungary prepared last year, PricewaterhouseCoopers described the nation's IT industry as "one of the strongest in the region" and praised the country for its favorable policies towards outside investors.

The report noted, however, that the spread of IT knowledge is "extremely unbalanced" and centered almost entirely on the capital, Budapest.

Telecommunications services in Hungary are weaker than in Western Europe but improving, according to the report, which is published on Pricewaterhouse's Web site (see link below).

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