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Hungary Cooperation Agreements and Joint Ventures
In addition to engaging in direct foreign trade in the
late
1980s, enterprises and foreign firms could enter into
cooperation
agreements or joint ventures that gave Hungary access to
Western
technology and opened new markets. Cooperation agreements
took
many forms, including the sale of a plant or production
line with
partial payment to the seller made from products from the
plant
or line; the subcontracting of a domestic firm to
manufacture
products; license agreements under which the foreign
partner
provided technology to the Hungarian partner to produce a
particular product; and production agreements under which
the
foreign partner provided equipment, expertise,
manufacturing
processes, and sometimes financing to the domestic
enterprise and
then purchased all or part of the output. In the late
1980s, the
government levied a 40 percent tax on profits from
cooperation
agreements. The 1988 foreign-trade law gave Hungarian
enterprises
greater freedom to conclude cooperation agreements.
Western
companies tended to prefer cooperation agreements to joint
ventures because cooperation agreements were more flexible
and
carried less risk.
The closest cooperation between Hungarian and foreign
firms
took place through joint ventures, which the government
first
legalized in 1972. In a joint venture, a foreign firm and
a
domestic enterprise each put up capital to establish a new
company to produce goods or services. Hungarian law
required that
the Hungarian enterprise hold at least a 51 percent stake,
except
in such areas as banking and services; in which the
Ministry of
Finance could authorize the foreign owner to be the
majority
shareholder. In 1985 a West German cosmetics firm became
the
first nonbanking Western firm to hold a 51 percent stake
in a
joint venture with a Hungarian enterprise. The government
levied
a 20 percent profit tax on joint ventures and permitted
the
foreign partner to repatriate its share of the earnings in
convertible currency. The Hungarian National Bank
guaranteed the
foreign partner's share of the capital against state
takeover
subsequent to the agreement. When a joint venture
terminated, the
foreign firm could repatriate its share of the capital
investment. Only three joint ventures were operating in
1977, and
in an effort to entice more foreign partners the
government
broadened the joint-venture law several times and created
customs-free zones in 1983. The number of joint ventures
rose to
35 in 1984 and to more than 100 in 1988. Most of Hungary's
joint
ventures involved companies from West Germany, Austria,
Switzerland, the United States, and Sweden.
Hungarian enterprises frequently requested foreign
partners
in joint ventures or cooperation agreements to take
payment in
kind and then market the goods in the West. Analysts
estimated
that these and other countertrade arrangements have made
up a
sizable share of Hungary's trade with the West since the
early
1970s, but exact figures were unavailable in mid-1989. The
frequency and size of requests for countertrade increased
after
Hungary began austerity measures to reduce its foreign
debt and
trade deficit in 1988.
Data as of September 1989
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