DRAFT
Country Report on SME needs in relation to cleaner production and compliance with environmental regulations
Hungary
DRAFT
Prepared by:
Hungarian Cleaner Production Centre
CorvinusUniversity of Budapest
June 2009
Foreword
This report has been compiled by the Hungarian Cleaner Production Centre (HCPC) hosted by the Corvinus University of Budapest, Hungary within the framework of the ACT CLEAN Project financed by the Central Europe Programme of the European Union.
The objective of this country report is to provide an overview of the economic situation of small and medium-sized enterprises in Hungary with a special focus on their innovation activities in the field of environmental protection. The report is part of Work Package 3 of the ACT CLEAN Project and aims at providing baseline information to be used in identifying the needs of SMEs in the country.
Information provided in the report over the performance of SMEs in the country is based on statistical data; the experiences of the HCPC as a service provider to SMEs in the country for more than ten years; as well as on several surveys carried out by different institutions in the country relating to the environmental performance of enterprises.
While every effort has been made to make the report up-to-date and accurate, data in some fields were not available for the last one or two years and surveys cited in the text have their own limitations. In such cases we tried to provide information from our general insights on the sector in focus.
Contents
Foreword
I. Overview of the SME sector in Hungary
I. 1 General situation of the economy
I.2 SMEs in Hungary
I.4 SMEs and the environment
II. Framework situation
II.1 Broader framework: Institutions of the European Union
II.2 Country specific institutions
III. Analysis
IV. Needs (synthesis)
V. Conclusions
Literature
I. Overview of the SME sector in Hungary
I. 1 General situation of the economy
After the fall of communism and the collapse of the COMECON markets in the early 1990s, industrial production in Hungaryhad to undergo major changes in order to conform to Western market standards. This involved the modernization of technologies as well as products. Foreign capital played a very important role in this transition, mainly large multinational mechanical companies, but also the food and the chemical industry. At the same time, the Hungarian food industry lost ground and the light industry branches generally fell into a decline mainly because of the massive influx of cheap Asian products. The chemical and rubber industry are holding on to their positions, especially the pharmaceutical industry which has benefited from substantial foreign investments and is highly successful internationally. The supply of electricity, gas and steam will see significant development in the near future, and the energy sector is also expected to develop faster in the next few years.
There is a general growth trend in the chemical and the metals industry, the manufacturing of vehicles, machines, coke, and oil processing. On the other hand, capital is being withdrawn from sectors like textile, leather products and the paper industry. It seems that the industrial policy is not paying sufficient attention to protecting those sectors which have fallen into a decline, such as the food industry for example. Another negative trend is that the growth rate of those sectors which have been growing faster than the average has been diminished (for example electrical equipment and vehicles). This is not a surprising tendency and can probably be explained by the fact that capacities developed as green field investments can no longer be expanded significantly.
An important characteristic of the Hungarian economy are the regional inequalities. The capital region and also Western Hungary are significantly more developed across a wide range of indicators such as GDP, wages, unemployment situation, etc. than the rest of the country. These differences are also reflected in enterprise density. The main reason behind the gap is the proximity to markets as well as infrastructural conditions.
I.2 SMEs in Hungary
The following tables provide a detailed overview of the Hungarian SME sector regarding the number of businesses (Table 1), the number of persons employed (Table 2) and the value added produced (Table 3) (data are from 2007). The tables show that the vast majority of enterprises in Hungary are small and medium-sized companies and only a fraction of the enterprises have more than 250 employees. While the share of SMEs in the overall number of companies is overwhelming, large corporations contribute to the economy of the country to a significant proportion. It is a general characteristic of the Hungarian economy that the role of the “motor” is played by large, mainly multinational companies. These provide up to 50% of the country’s GDP, about 70% of the industrial production and 75% of exports. Many Hungarian SMEs benefit from the presence of these companies by acting as their suppliers.
Table 1. Number of enterprises by size category and sector
micro / small / medium-sized / SME / large / totalTotal
(non-financial business economy) / 532 618 / 24 883 / 4 169 / 561 670 / 853 / 562 523
By NACE section
mining and quarrying / 407 / 99 / 28 / 534 / 2 / 536
manufacturing / 54 814 / 6 578 / 1 854 / 63 246 / 484 / 63 730
electricity, gas and water supply / 411 / 115 / 98 / 624 / 57 / 681
construction / 68 492 / 3 612 / 377 / 72 481 / 25 / 72 506
wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods / 146 555 / 7 131 / 831 / 154 517 / 96 / 154 613
hotels and restaurants / 31 022 / 1 817 / 142 / 32 981 / 18 / 32 999
transport, storage and communication / 36 887 / 1 602 / 232 / 38 721 / 71 / 38 792
real estate, renting and business activities / 194 030 / 3 929 / 607 / 198 566 / 100 / 198 666
Source: EUROSTAT
Table 2. Number of persons employed in the business economy by size category and sector
micro / small / medium-sized / SME / large / totalTotal
(non-financial business economy) / 862 832 / 478 101 / 411 329 / 1 752 262 / 744 396 / 2 496 658
By NACE section
mining and quarrying / 959 / 2 221 / 2 367 / 5 547 / 1 248 / 6 795
manufacturing / 109 018 / 138 080 / 195 060 / 442 158 / 349 492 / 791 650
electricity, gas and water supply / 852 / 2 694 / 10 352 / 13 898 / 45 888 / 59 786
construction / 77 614 / 67 015 / 32 095 / 176 724 / 13 879 / 190 603
wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods / 285 010 / 130 946 / 76 579 / 492 535 / 87 468 / 580 003
hotels and restaurants / 68 032 / 32 292 / 13 311 / 113 635 / 13 109 / 126 744
transport, storage and communication / 61 949 / 30 725 / 22 270 / 114 944 / 167 835 / 282 779
real estate, renting and business activities / 259 398 / 74 128 / 59 295 / 392 821 / 65 477 / 458 298
Source: EUROSTAT
Table 3. Value added at factor cost (million Euros) by size category and sector
micro / small / medium-sized / SME / large / totalnon-financial business economy / 7 818 / 8 055 / 9 007 / 24 880 / 23 942 / 48 822
By NACE section
mining and quarrying / 24 / 41 / 82 / 147 / 54 / 201
manufacturing / 857 / 1 895 / 3 749 / 6 501 / 13 914 / 20 416
electricity, gas and water supply / 61 / 155 / 236 / 452 / 1 988 / 2 439
construction / 697 / 848 / 708 / 2 252 / 495 / 2 748
wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods / 2 166 / 2 552 / 1 959 / 6 676 / 1 649 / 8 325
hotels and restaurants / 201 / 209 / 162 / 571 / 228 / 799
transport, storage and communication / 532 / 626 / 725 / 1 884 / 4 765 / 6 649
real estate, renting and business activities / 3 279 / 1 731 / 1 387 / 6 397 / 848 / 7 245
Source: EUROSTAT
The next table (Table 4) shows the average number of employees in Hungarian businesses. Since micro enterprises are the most numerous in Hungary, the average company size is also very small, with the average Hungarian SME having 3 employees.
Table 4. Number of persons employed per enterprise by size category and sector
micro / small / medium-sized / SME / large / totalTotal
(non-financial business economy) / 2 / 19 / 99 / 3 / 873 / 4
By NACE section
mining and quarrying / 2 / 22 / 85 / 10 / 624 / 13
manufacturing / 2 / 21 / 105 / 7 / 722 / 12
electricity, gas and water supply / 2 / 23 / 106 / 22 / 805 / 88
construction / 1 / 19 / 85 / 2 / 555 / 3
wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods / 2 / 18 / 92 / 3 / 911 / 4
hotels and restaurants / 2 / 18 / 94 / 3 / 728 / 4
transport, storage and communication / 2 / 19 / 96 / 3 / 2 364 / 7
real estate, renting and business activities / 1 / 19 / 98 / 2 / 655 / 2
Source: EUROSTAT
Comparing these data with overall EU figures (Table 5, data for all countries only available for 2005), it can be seen that the proportion of SMEs within all companies in Hungary is the same as the European average – however, the share of micro-enterprises is larger in Hungary. Compared to the size of the population, the overall number of businesses in Hungary is relatively high, meaning that there are 55 SMEs per 1000 inhabitants in Hungary, opposed to about 40 in the EU. Regarding the weight of the SME sector in the economy, Hungarian SMEs provide a higher share of employment but a smaller part of the value added than the European average, meaning that the productivity of Hungarian SMEs is smaller.
Table 5. The SME sector in Hungary and the EU
Number of enterprises / Number of persons employed / Value added (MEUR)Value / % / EU26 average / Value / % / EU26 average / Value / % / EU26 average
Micro / 527511 / 94,7% / 91,8% / 902589 / 35,8% / 29,6% / 6345 / 15,8% / 21,1%
Small / 24730 / 4,4% / 6,9% / 476428 / 18,9% / 20,6% / 6561 / 16,3% / 19,0%
Medium / 4116 / 0,7% / 1,1% / 409015 / 16,2% / 16,8% / 7288 / 18,1% / 17,8%
SMEs / 556357 / 99,8% / 99,8% / 1788032 / 71,0% / 67,1% / 20194 / 50,2% / 57,9%
Large / 839 / 0,2% / 0,2% / 730726 / 29,0% / 32,9% / 19988 / 49,7% / 42,1%
Source: European Commission: SBA Factsheet Hungary 2008
In 2008, the European Commission launched an initiative under the name „SME performance review”, which features annual country reports based on several indicators to evaluate the situation of SMEs in each MemberState.[1] The indicators cover a wide variety of issues including entrepreneurial culture, the regulatory environment, access to financing, participation in foreign trade, innovation and environmental performance.
Regarding entrepreneurship, it is interesting to note that more Hungarians have experience of running a company than the European average (30% as opposed to 23%), but only 44% see entrepreneurship as an opportunity (EU: 58%) and the proportion of those who find it desirable to be self-employed is also lower. This indicates that for some Hungarians, starting a business is not a matter of choice but a necessity due to the lack of employment opportunities or the need for supplementary income. This has important implications for the innovation policy of the country, since such SMEs are less likely to search for innovative solutions and only strive for survival in the marketplace due to a lack of not only resources and entrepreneurship skills but also positive attitudes.
When it comes to the regulatory environment, we find a mixed picture. Hiring and firing procedures are relatively simple in Hungary, and the costs of enforcing contracts is also lower than the EU average (13% of the claim compared to 19%). On the other hand, closing a business (15% of the estate) and registering property (11% of the property value) is more expensive in Hungary. The share of Hungarian SMEs involved in public procurement contracts is very high (68% compared to 42%), but the amount spent by the government on SME policies is much lower (4% of all state aid as opposed to 11% in the EU).
Finance indicators were evaluated to be in line with EU average levels, with a higher share of lost payments (3,4% versus 2,4%) and longer payment delays (73% of the number of contract days versus 50%) but exceptionally high state guarantees for SMEs.
Hungary is performing very well in terms of transposing and implementing EU directives related to the single market, but the ability of Hungarian SMEs to export within the EU is very low, with only 0,5% of Hungarian SMEs involved in intra-EU export, compared to the EU average of 2,9%. The same is true for non-EU exports – here 1,8% of Hungarian SMEs are active, compared to 3,8% in the EU. (This is of course only true for direct exports – many Hungarian SMEs supply large, mainly multinational manufacturing companies which provide the bulk of the country’s exports.) The time required for import and export procedures is also longer, 17-18 days compared to an average of 13.
Hungarian SMEs are noticeably lagging behind their European peers in terms of learning and innovation activities. This is shown in the lower participation in learning activities (the difference is especially pronounced in the case of micro enterprises – 13% in Hungary versus 47% in the EU), and the shorter periods of training provided to employees. The share of SMEs having income from new products is only 46% compared to the EU average of 63%.
For the environment, the indicators observed in the EU survey were the prevalence of energy saving systems and measures and the amount spent on environmental protection. Regarding saving energy, 2% of SMEs reported to have complex energy saving systems installed (EU average: 4%) and 25% (EU average: 29%) indicated to apply simple rules or devices to this end (both forms of saving energy show a clear increase with company size). The environmental spending of Hungarian SMEs (370 Euros) is much lower than the EU average of 900 Euros. However, it should be added that from a cleaner production perspective, this may not be an appropriate indicator since it does not include improvements which are implemented with other goals in mind (i.e. reducing costs)butcan bring important environmental benefits at the same time.
In November 2006, a special Eurobarometer survey was conducted among SMEs in each EU member state (in Hungary, a total of 481 SMEs and 34 large companies completed the questionnaire)[2].
Regarding the problems encountered by the company in the last two years, the most widespread issues were the high price of labour (71% of SMEs, EU average 33%), the limited purchasing power of customers (65% of SMEs, EU average 46%) and problems with administrative regulations (55% of SMEs, EU average 36%). Hungarian SMEs reported to spend relatively little time on administrative tasks related to legal information requirements – 42 days opposed to the EU average of 69 days. (Interestingly, large companies show a reverse relationship with 224 days in Hungary and 186 day in the EU.)
Regarding innovation, only 20% of SMEs indicated they had problems with the implementation of new technologies (EU average 17%), and 7% had problems with new forms of organization (EU average 15%). These problems were relatively more widespread in the case of large companies, as it is these companies which are more likely to experiment with innovative solutions at all. Among the constraints to innovation, problems with access to finance were cited most often among SMEs (16.2%, plus 6.4% for high interest rates). 52% of SMEs stated that they did not have any plans to innovate during the past two years, which is much higher than the EU average of 37.5%.
In Word Bank’s “Doing Business” survey Hungary ranked 41th in the World in 2009 for the ease of doing business (up from 50th place in 2008)[3]. Hungary performed better than its overall rank on the ease of enforcing contracts, getting credit and starting a business. The biggest problem identified which is relevant to SMEs is the tax system with its time consuming procedures and high overall tax rate, with tax payments taking up 57.5% of companies’ profits. Employing workers, dealing with construction permits and trading across borders were also evaluated to be relatively difficult.
A recent Hungarian SME survey[4] shows that the most important factors impeding the growth of SMEs are high taxes and contributions (77%), the unpredictability of the regulatory environment (63%) and strong competition (56%). When asked in which area it would be the most important to reduce administrative burdens, it was also various tax procedures which were considered most burdensome. Administrative requirements related to environmental regulations were only ranked 10th in the overall SME sample, but their importance increased with company size, medium size enterprises putting them in 6th place.
I.4 SMEs and the environment
The general situation concerning the environment in Hungary can be characterized – very briefly – as follows: the temporary economic decline, notably the collapse of the heavy industry that took place after the fall of communism in the early 1990s brought a substantial improvement in pollution levels. The development that has taken place since that time was characterized by significant changes in the technology and the structure of the Hungarian economy, meaning that the earlier levels of economic activity could be attained and surpassed without returning to the earlier emission levels. Stimulated by the requirements connected to EU accession, Hungary also put in much effort to improve environmental infrastructure (notably the waste and wastewater collection and treatment systems), a process which continues into the present.
Today the general condition of the environment in Hungary is relatively good compared to most Western European countries (relatively clean rivers and soils, smaller CO2 emissions and waste generation, etc.), which is mainly due to the level of economic activity and consumption which is still lower than in the EU15. However – despite major improvements in the past two decades –the environmental efficiency in Hungary is still lagging behind Western standards.
The environmental performance of Hungarian SMEs is difficult to assess because of a lack of detailed information. Statistical data on environmental emissions is collected only on a level of sectors (such as industry or transport) and not broken down by company size. Studies have been carried out on the environmental practices of the corporate sector in general, but here also there is a lack of focus on smaller companies. Therefore the environmental performance and eco-innovation practices of SMEs can only be inferred indirectly from the general information available.
Notably, there is one study which provides internationally comparable data on the environmental practices and performance of Hungarian firms.[5] The survey for this study was carried out across OECD countries in 2003, sampling 466 Hungarian companies. Other countries included in the survey were Canada, France, Germany, Japan, Norway and the United States. Approximately 60% of the Hungarian sample fall into the SME category, but they are mainly medium sized companies, with less than 5% of having fewer than 50 employees.
The results of the survey regarding the use of environmental management tools can be seen in the following table. (Table 6) It can be seen that the use of most tools can be considered average among Hungarian companies, with, on the one hand, internal auditing and environmental accounting practices somewhat underdeveloped, on the other hand, environmental reporting, assessing the environmental performance of suppliers and requiring them to undertake environmental measures very common. The last two are very important, showing that SMEs supplying or intending to supply these companies have strong incentives to improve their environmental performance.
Table 6. Proportion of facilities (%) applying different environmental management tools (significantly over average: bold, below average: underlined)
The application of environmental management systems shows an ambiguous picture, since the proportion of Hungarian companies using environmental management systems is low compared to the other countries, but on the other hand, the prevalence of formalized and certified EMS is far above average. This suggests that for most Hungarian companies, external factors (better opportunities to gain presence on the international market with a certified EMS) are more important than internal motivations (such as higher eco-efficiency or better transparency of environmental processes). Indeed, it seems that the openness and export orientation of the Hungarian economy is a very important driving force for improvements in environmental performance – the previous table (Table 6) also suggests that the strict requirements faced on the foreign markets spin off through the whole of the supply chain. This is also reflected in the influence of various stakeholders on the environmental practices of companies (Table 7), with the influence of commercial buyers being above average in Hungarian companies.