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Hungary-Cooperation Agreements and Joint Ventures

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Hungary Index

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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