Introduction

Since 1989, Hungary has been among the leading Central and Eastern European (CEE) countries in attracting foreign direct investments (FDI). It was always the priority of various governments to attract FDI into the country, partly because of the specificities of the country's heritage from the socialist-communist period. This stance was translated into various policy measures, which were favorable – in some cases discriminatory – towards foreign investors, especially for those who undertook large projects in the country. This friendly approach to foreign investors has become a common feature of capital-lacking Central and Eastern European economies, with the possible exception of Lithuania, Poland and Slovenia. This rather descriptive chapter, after briefly describing the main characteristics of FDI in Hungary, presents in detail policies which tried to attract higher volumes of FDI and which have been aimed at increasing their positive impact on the domestic economy by promoting backward linkages. Two short company case studies, both on affiliates receiving substantial policy support, illustrate how companies may impact the domestic economy in different ways. A brief review of the literature provides the basis for evaluating the FDI policies of Hungary. In the following section, we try to extend our analysis by discussing the direct and indirect impacts of the global financial crisis on FDI and Hungary's policy responses to this crisis. The concluding section summarizes our main findings.

Foreign direct investment in Hungary

Hungary is a small open economy, which started the transition process from socialism to the market economy in 1989. Compared to its neighbors it was more open to foreign investments even before 1989. At the beginning of the transition, it had a close to USD 400 million stock of FDI (Csáki, 2001), mainly in the form of joint ventures ( JVs), due to the fact that the establishment of JVs was allowed by law since 1972. More significant volumes of FDI started to arrive to the country in 1991, reaching a peak point of the decade in 1995, connected mainly to privatization in the profit of foreigners. Since 19951, the annual inflow fluctuated in the range of USD 2 to 6 billion. While up till 1998, new investments (equity) dominated the annual inflow, after that, additional investments of affiliates already present in Hungary in the form of reinvested earnings and other investments became more important.