SMEs in Hungary

Abstract

The article will concentrate on the development of SMEs and their structures as well as on the institutional and policy framework in Hungary. The first part looks at private entrepreneurship and SMEs under socialism whilst the second part describes the ‘origin’ of Hungarian entrepreneurs after socialism. Part three deals with SME development, part four with the structure of the SME sector and its contribution to the national economy during the 1990s. Part five analyses the institutional framework and SME policies of the Hungarian government. Part six summarises the findings and considers the ‘fitness’ of SMEs in Hungary regarding their EU accession.

Full text

SMEs in Hungary
by Friederike Welter
Introduction
One of the important issues facing Central and Eastern European countries in the
transformation from centrally planned to market economies is the need to develop small and
medium sized enterprises (SMEs). The potential role of SMEs includes generating
employment and thereby possibly absorbing labour surpluses which result from economic
restructuring, contributing to the development of a competitive economy with diversified
structures, and being a source of innovation. Data for the European Union (EU) illustrates the
important contribution of SMEs: They account for 99% of all enterprises, 66% of
employment and turnover. In Central and Eastern Europe rapid progress with transformation
was accompanied in most countries by a rapidly evolving private sector including SMEs due
to privatisation and the formation of new firms.
The article will concentrate on the development of SMEs and their structures as well as on the
institutional and policy framework in Hungary. The first part looks at private entrepreneurship
and SMEs under socialism whilst the second part describes the ‘origin’ of Hungarian
entrepreneurs after socialism. Part three deals with SME development, part four with the
structure of the SME sector and its contribution to the national economy during the 1990s.
Part five analyses the institutional framework and SME policies of the Hungarian
government. Part six summarises the findings and considers the ‘fitness’ of SMEs in Hungary
regarding their EU accession.
1. SMEs and entrepreneurship in Hungary under socialism
Although in Hungary private entrepreneurship lost its major role with the introduction of a
centrally planned economic system, different forms of private entrepreneurship co-existed
beside state ownership and entrepreneurship within state enterprises during the socialist
period. In this regard, one can distinguish between the formal and the grey economy
(consisting of the second and the illegal economy), whose ‘boundaries’ frequently changed
following political trends of liberalising and restricting private ownership and
entrepreneurship (Welter, 1996). The formal economy included state enterprises, co-
operatives and legalised private businesses such as small family businesses, mainly craft
firms. The term second economy refers to any form of unlicensed but tolerated private
entrepreneurial activities, including unlicensed activities in the private sector that were not
officially recorded, as well as the clandestine use of state property (e.g., raw materials,
machines, labour, services) for private business activities (Dallago, 1990). It can also be
applied to the so-called ‘parallel circuits’ of state firms and co-operatives that were motivated
by official enterprises searching for ways to meet planning targets (Kerblay, 1977). Finally,
during the socialist period the illegal economy was made up of quasi-criminal activities
within state enterprises (bribes, theft of resources) and also criminal private activities.

2
Employment in private enterprises played only a minor role during the first years of socialism
in Hungary. In 1949 private employment accounted for 20% of all non-agricultural
employment; this share decreased to 3% in 1980 (Kornai, 1995: 91). Most private enterprises
were nationalised during 1949-1953, in 1958 private craft entrepreneurs had to join
production co-operatives (Gabor and Horvath, 1987: 134). This was accompanied by a shift
from smaller to larger firms. From 1958 to 1968 the share of small firms with less than 100
employees decreased from 28% to 11%, the share of large enterprises with more than 1,000
employees grew from a mere 10% to 37% (Kornai, 1995: 453). Moreover, this development
went hand in hand with a concentration process through the formation of trusts and
associations. At the end of the 1970s there existed 23 trusts consisting of approximately 350
state-owned firms, 3,000 plants and employing 600,000 workers (Grabher, 1994). However,
entrepreneurship and employment in the second economy still played an important role.
Whilst at the end of the 1970s around 5% of the Hungarian workforce worked in the legal
private sector, at least an estimated two third of all households earned an additional income in
the second economy (Grabher 1994). In an attempt to transform this informal ‘neighborhood-
based subsistence production’ (Grabher 1994: 9) the Hungarian government allowed for new
organisational and legal private forms of enterprise.
The first steps towards the (re-)development of private entrepreneurship and businesses in
both the formal and second economy occurred from 1968. Central planning and central
allocation of resources to firms was abolished almost totally whilst a system of financial (dis-
)incentives was introduced as a management instrument for state-owned firms (Laky, 1985;
Grabher, 1994). Although the Hungarian government introduced these reforms to develop
price and profit orientation in state firms, they resulted instead in bargaining processes
between directors of state-owned enterprises and the state administration which in turn
favoured the development of informal networks – the so-called parallel circuits.
Reforms towards legal private enterprises were more successful on the whole in introducing
private entrepreneurship. In 1973 the Hungarian government allowed the creation of joint-
ventures, in the late 1970s it liberalised retail trade by renting shops to private entrepreneurs
(Bod, 1989). During the 1980s legal private entrepreneurship gained momentum (Table 1)
when economic reforms increased the number of employees allowed in small firms and
introduced different state and private enterprise organisations such as the totally private
business partnership (GMK) consisting of no more than 30 members and 30 employees which
were predominately formed in industry, construction and services or the so-called business
work partnerships (VGMK). Here, from 1982 onwards, state employees could rent machinery
or space from their employer to collectively produce their own products and services.
However, these private initiatives eventually became working brigades for state enterprises
performing overtime work (Laky, 1989). Furthermore, they also reinforced parallel circuits
within state enterprises (Bohle, 1996).
Although private independent enterprises and partnerships accounted for 98% of all private
organisations and already 60% of employment in 1998 (Table 1), the state and especially
large state organisations still played the most important role in the national economy. 97% of
all wage earners were still employed in the state sector, only less than 1% of them belonging
to small state units (Laky, 1991: 250ff, also for the following figures). Whilst the number of
independent self-employed craft and retail entrepreneurs and their employees increased by

3
nearly 100,000 between 1981 and 1988 their total number amounted to only half of that of
1940. In addition, one third of the craft entrepreneurs only worked part-time, in an attempt to
earn additional income (Table 1). The impact of the new partnership forms was also limited:
70% of private business partnerships were working part-time, three quarters had no fixed
assets invested in their organisation at all (Table 1, Laky, 1991).
Table 1 Legal small businesses in Hungary in 1988
Enterprises
Employees
% full-time
Average
membership
Small state plants
Traditional state firms & co-ops
(<300 members)
1,823
307,413
100
169
Small state-owned firms
213
24,829
100
117
Subsidiaries
277
24,079
100
87
Small co-ops
2,126
95,364
100
45
Sub-total
4,439
451,685
Partnerships
Business work partnership
(VGMK)
19,120
241,194
0
13
Specialised groups in co-ops
2,336
85,123
25
36
Civil law partnerships (PJT)
2,200
9,289a
66
4
Private business partnership
(GMK)
11,186
74,795a
30
7
Sub-total
34,842
410,401
11
Independent legal private business
Craft industry
154,611b
215,468 a
66
1.4
Small retail trade
35,099
59,087 a
100
2
Sub-total
189,710
274,555
Total
228,991
1136,641
Source: Laky, 1991: 252.
2. Where do Hungarian entrepreneurs come from?
Hungary started the transition process towards a market-based economy already with a
considerable number of private businesses, moreover, entrepreneurial behaviour in one form
or another never totally lost its importance during socialism. An interesting question in this
context concerns the potential of entrepreneurial activities during the socialist period to ‘breed
capitalism’ (Kornai, 1992). In Hungary – as elsewhere in transformation countries - both state
and private entrepreneurship that existed under socialism have provided a ‘seedbed’ for small
business activity during the transition period, in both the formal and informal economy. Tibor
identifies different groups of contemporary Hungarian entrepreneurs based on their
demographic and business characteristics (Tibor, 1994: 65): artisans and retailers from the
period before 1982 and their offspring, old-new owner-managers from the 1980s, forced
entrepreneurs from the early transition period who lost their job due to the restructuring of
large enterprises, managers of state-owned enterprises and ‘old’ co-operatives as well as
managers of newly established privatised firms, owners/managers of newly established small
firms and joint ventures.
Many directors and managers of state-owned enterprises as well as former politicians (the
nomenclatura) have used their ‘parallel circuits’ to privatise ‘their’ enterprises or to establish
new businesses (Dallago, 1997, Lageman, 1995). The ‘spontaneous privatisation’ that

4
occurred in Hungary in 1988/89 was one such source of nomenclatura entrepreneurs
(Frydman et al., 1998, also Bohle, 1996). As soon as the government introduced new laws
allowing for the conversion of state enterprises into corporate legal forms, a large number of
directors stripped ‘their’ state-owned companies of assets in order to start their own business.
Another source is young sons and daughters whose parents were members of the socialist
political nomenclatura that used their connections to set up new businesses (Tibor, 1994).
Formerly independent private enterprises such as the craft and retail trade enterprises
continued to exist during the transition period, mainly aiming to contribute to the family
income. These entrepreneurs, most of whom are elderly people (Tibor, 1994) often experience
difficulties in adjusting to the requirements of a market economy, as during socialism they
acted on seller markets. Old-new entrepreneurs from the 1980s who are generally educated to
university level could be found among the large number of people who (re-)registered new
businesses once legislation abolished the legal and administrative barriers to private firms,
enabling them to operate on an equal basis with state owned companies (Kuczi and Vajda,
1992).
Finally, Hungary had a strong pre-war tradition of private entrepreneurship which resulted in
a number of entrepreneurs during the transition period originating from former
entrepreneurial families. Pre-war entrepreneurs and their offspring had either been (partly)
self-employed in the second economy, or they had often occupied leading positions in state
enterprises during the socialist period, i.e. they ‘parked’ their entrepreneurial skills (Szelenyi,
1988). This apparently confirms a thesis modelled on Max Weber’s research stating that
cultural entrepreneurial traditions could be transported via professional positions allowing for
autonomous decisions (Welter, 1996).
3. The development of SMEs during the 1990s
When the transformation process started, the number of all enterprises doubled in Hungary
within five years (1991-1996). Overall, these developments are due to the upsurge in private
and small-scale entrepreneurial activities which immediately followed the introduction of
market reforms. Using the number of sole proprietorships as an indicator for newly created
SMEs, nearly 650,000 SMEs existed in Hungary in 1998, almost twice the figure for 1990.
Hungary had an already considerable level of private entrepreneurship resulting from the
previous reforms during the centrally planned period. However, compared to the beginning of
the transition process, when small scale privatisation and new market opportunities
contributed to an enormous increase in SMEs, the initially rapid growth rate of SMEs has
slowed down (Table 2). The number of SMEs reached its peak in 1995 and has been declining
since then although the corresponding growth rates have been decreasing since 1993.
The national enterprise register only paints a very rough picture of the temporal development
of the number of SMEs because the regulations regarding registration changed over time.
Furthermore, in 1994 the Hungarian Statistical Office introduced new categories for
registered companies which render any temporal comparison difficult. To illustrate the
development of SMEs, therefore, the share of private entrepreneurs or micro enterprises –
measured as the share of sole proprietorships - is taken as a more appropriate indicator. Table
2 shows a declining trend with regard to natural persons and self-employed respectively over

5
the past decade (1990-1998). During the same period the share of private companies (legal
persons) has been rising. The same applies to growth rates: the growth rate for natural persons
is decelerating, while that for legal companies is accelerating. This general trend is partly due
to ‘normal’ high market turbulence characteristic of the SME sector, resulting in high rates of
market entry and market exit. In Hungary, this overall development goes hand in hand with an
overall decreasing share of private legal and natural persons resulting from a shift to limited
partnerships as the legal form favoured by small enterprises.
Table 2 Development of micro enterprises in Hungary 1990-1998
Sole proprietorship
Total enterprises
% of total
Number
Number
1990
96.8
387,340
400,018
1991
92.4
510,459
552,737
1992
91.1
606,207
665,181
1993
82.6
688,843
833,908
1994
80.9
778,036
961,177
1995
78.9
791,496
1,003,624
1996
74.3
745,247
1,002,946
1997
65.8
656,690
998,264
1998
63.2
648,701
1,026,642
Source: Own calculations
Another reason explaining the declining growth rates for natural persons relates to the
changing registration procedures which certainly reduced the number of persons registered
‘just in case’. For example, in the early 1990s a large number of small enterprises simply
registered to profit from tax privileges which, however, were only given to firms registered
before 1991 (Lageman et al., 1994). A look at data for ‘dormant’
1
and ‘operational’ firms
shows that in 1998 around three quarters of all registered enterprises were operating, only one
quarter were dormant (Table 3). Not surprisingly, legal forms and the actual status of
entrepreneurial activities correlate. While around three quarters of sole proprietors are active,
the figure rises to around 85% for limited liability companies. This is principally related to the
requirements (for example, minimum capital) connected with setting up a limited liability
company.
Table 3 Registered and operational entrepreneurial activities in Hungary, 1998
1
Dormant firms are those enterprises that are registered but never started their activities or which no longer
operate but have not closed down legally.
Registered number
Active number
as % of
registered
Sole proprietorship
648,701
485,355
74.8
Unlimited partnership
5,006
4,063
81.2
Limited partnerships
161,857
140,449
86.8
Limited liability companies
157,990
134,107
84.8
Joint stock company
4,251
3,736
88.5
Co-operative
8,230
5,668
68.9
All legal forms
1,026,642
779,470
75.9
Source: Own calculations

6
Table 4 Full- and part-time entrepreneurship in micro enterprises in Hungary 1992-1996
Full time
Part timea
Pensioners
1992
45.5
42.1
12.4
1993
44.4
43.0
12.6
1994
44.6
42.3
13.1
1995
45.9
40.9
13.2
1996
47.0
39.1
13.8
Source: Own calculations based on Institute for Small Business Development 1997. - a defined as second job holder
Naturally, the share of registered ‘dormant’ firms will decline during the transition process
due to newly introduced strict regulations and a possibly falling optimism regarding
entrepreneurial activities. Certificates issued by the chamber of commerce, and social security
regulations introduced in 1997-1998, for example, rendered the operation of dormant firms
even less lucrative (Tibor, 1998). Research by the Rhine-Westfalia Institute for Economic
Research estimated the share of Hungarian dormant firms in 1993 to be around 40%
(Lageman et al., 1994). In 1996 data published by the Hungarian Statistical Office showed
this share amounting to 36% whilst in 1998 the share of ‘dormant’ firms had decreased to
25%. However, in that context a considerable share of micro enterprises still operates on a
part-time basis. Table 4 indicates that less than half of those self-employed (that is, the
registered sole proprietorships) carry out their entrepreneurial activity full time, although this
share has been growing continuously since 1994.
4. Structure and role of SMEs in the Hungarian economy
Looking at enterprise size, micro enterprises dominate whilst small and medium enterprises
are notably underrepresented. Nearly 97% of all operating enterprises classify as micro firms
with 10 and less employees, only 3% are small firms employing between 11 and 50 persons
and less than 1% are medium firms with 51-300 employees. This overall general tendency
towards small and micro enterprises can be observed across all sectors, being particularly
pronounced in the tertiary sectors (Table 5). More than 97% of all enterprises in
manufacturing and 99% in trade and services classify as micro and small firms.
One obvious reason explaining the overall predominance of micro enterprises is the
considerable share of entrepreneurial activities which are carried out as second-job and part-
time activities, often in the informal economy (Kornai, 1996). A second reason results from
the difficulties related to the creation of medium-sized enterprises. The currently existing
medium-sized firms are mostly split-offs from large privatised companies. As in Western
Europe, greenfield investments in medium-sized firms still tend to be an exception, while the
vast majority of start-ups are micro and small firms. The observed size patterns furthermore
indicate a rather slow and time-consuming growth process from newly created micro and
small firms into medium-sized enterprises. In this context Gabor (1997: 168) even speaks of a
‘marginalization’ of the small business sector due to the lack of expansion of small firms, the
upsurge of part-time business and the large share of hidden and unregistered small businesses.
However, even in Western economies most SMEs stay small, as Bridges et al. (1998: 122)
note: “Once they have started their own business, electricians, plumbers, chimney sweeps and
consultants, for instance, rarely grow, and many other one-person businesses are the same:
static is the normal state for them.”

7
Looking at the regional distribution of Hungarian SMEs the overall national SME density,
calculated as the share of sole proprietors per 1,000 inhabitants, averages out at 45 enterprises
per 1,000 inhabitants ; this, however, conceals huge differences within the country. Regional
disparities in SME density often follow historical spatial patterns. In Hungary, the
agglomeration of Budapest and the western (border) regions were historically the earliest
developed areas in terms of industrialisation and infrastructure. One can still observe this
pattern. SME densities in Budapest and the Western regions are 53 and 48 enterprises per
1,000 inhabitants respectively, whilst SME development lags behind in those north-eastern
regions that are predominantly agricultural areas with some highly specialised (former) state
industries (Institute for Small Business Development, 1997). These latter regions, with
patterns of specialisation resulting from the era of central planning (cities with heavy industry
combines), but also ‘old’ industrial regions, experience a much slower development of SMEs.
Here SME density is far below the Hungarian average, amounting to 35 enterprises per 1,000
inhabitants in Northern Hungary and 38 enterprises per 1,000 inhabitants in the Northern
Great Plain.
The sectoral distribution of SMEs in Hungary is, on the whole, still distorted, especially in
manufacturing with its rather low number of SMEs. In 1998 the number of SMEs in trade was
more than double the number of SMEs in manufacturing. Low entry barriers, in terms of low
capital and skill requirements, and a formerly underdeveloped tertiary sector resulted in high
numbers of start-ups in trade and services in the first years of transition. Small-scale
privatisation played an additional role in creating SMEs in these fields.
Table 5 Main sectors of active enterprises in Hungary in 1998
Manufacturing
Trade, repair
Catering, transport
Total
% vertical
Number
%
Number
%
Number
%
numbera
0-10
75,477
91.1
211,517
97.8
89,065
97.9
756,682
11-50 employees
4,929
6.0
4,014
1.9
1,598
1.8
17,096
51-300
1,944
2.4
674
0.3
253
0.3
4,799
More than 300
489
0.6
87
0.0
75
0.1
893
Total number
82,839
100.0
216,292
100.0
90,991
100.0
779,470
% of SMEs
horizontal
10.6
27.8
11.7
100.0
Source: Own calculations (including construction and agriculture)
Hungarian SMEs contribute to a large extent to economic development although a large share
of officially registered SMEs also partly produce in the informal sector (Kornai, 1996). In
1998 SMEs officially contributed slightly less than half of the GDP (Table 6). SMEs’
contribution to employment already corresponded to the EU level with a share of more than
two thirds (Table 7). Hungarian micro enterprises contribute more than one third, small firms
(10-49 employees) and medium enterprises (50-249 employees) around one third to total
employment. Between 1992 and 1998, the contribution of Hungarian SMEs to employment
rose by 38% and their contribution to the GDP went up by 16%. Absolute employment
figures for SMEs (as opposed to large enterprises) amounted to 2 million (large enterprises
0.9 million) in 1998, compared with 1.4 million (large enterprises 1.3 million) in 1992.
Micro enterprises with less than ten employees, in particular, increased their share in
employment (+72%), and small and medium enterprises increased their contribution to
Hungary’s GDP (+30% and +33% respectively).

8
These figures, however, cover size differences that emerge from the sectoral and size-specific
developments outlined above. With respect to employment, micro and small firms
experienced a more dynamic development than medium companies, where employment
declined from 1992 to 1996. Considering the official contribution of micro firms to GDP,
which increased only slightly from 1992 until 1998, the employment growth over the same
period allows for the conclusion that most micro enterprises produce in the informal sector. A
look at corrected data for the contribution of SMEs to GDP confirms this. Taking into account
undeclared revenues, the Statistical Office estimates that in 1997 SMEs’ contribution to GDP
amounted to nearly 55%, 24% was produced by micro enterprises alone (Institute for Small
Business Development 1999).
Table 6 Contribution of Hungarian SMEs to GDP 1992-1998, %
Enterprise
size
1992
1994
1995
1996
1997
1998
Without
employees
5.9
4.4
3.3
4.1
3.9
3.3
Micro
10.0
9.0
9.5
10.6
10.3
10.9
Small
10.6
14.1
14.1
13.4
13.0
13.8
Medium
16.2
21.9
22.5
21.7
21.2
21.5
Large
57.3
50.5
50.7
50.3
51.7
50.4
Source: Compiled from Institute for Small Business Development 1996, 1997 and 1999. - data based on tax
returns, no data available for 1993.
Table 7 Contribution of Hungarian SMEs to employment 1992-1998, %
Enterprise
size
1992
1994
1995
1996
1997
1998
Micro
21.5
30.4
34.6
34.7
35.5
36.3
Small
9.9
12.4
13.1
13.1
14.2
14.7
Medium
20.5
19.4
19.0
18.5
18.9
19.1
Large
48.2
37.9
33.2
33.7
31.4
29.8
Source: Compiled from Institute for Small Business Development 1996, 1997 and 1999. - data based on tax
returns, no data available for 1993
The conclusion is that, looking at sectors individually, tertiary sectors normally account for
the highest share in SME employment and SME output. Considering enterprise sizes, it is the
smallest enterprises that contribute most, with micro and small firms in tertiary sectors
contributing the highest share. Although these patterns are, at first glance, the result of an
initially distorted economic structure, they also resemble SME structures in highly
industrialised countries in one particular aspect, i.e. the overall trend towards tertiarisation,
and therefore a growing share of services and trade.
One of the reasons explaining increasing employment in SMEs is the decreasing employment
possibilities in large companies. In the years 1992-1996, increased employment in micro and
small enterprises was accompanied by declining figures for medium and large firms; medium
firms have gained ground slightly since 1997 (Institute for Small Business Development,
1999). Overall, from 1992-1998 SMEs were apparently able to absorb the major share of the

9
decreasing employment in large enterprises. SMEs contributed 560 thousand employment
possibilities whilst employment in large enterprises decreased by 513 thousand.
A different picture emerges with respect to the contribution of Hungarian SMEs to
innovation. Direct research and development appears to be extremely low in SMEs. Statistical
data – which, however, do not allow any conclusions with respect to enterprise size – show
that in 1998, 258 R&D units existed in enterprises employing a total of 6,393 research
personnel. 60% of these units were located in manufacturing enterprises, which indicates an
overall low share of research and development in Hungarian industry. Oakey (1997) observed
that many Hungarian high-technology small firms appear to lead a virtual existence,
‘mothballing’ their employees when there is no work. Moreover, since innovation in socialist
countries was mainly pushed by the state, SMEs generally lack the ‘culture of customer
satisfaction’ (Oakey, 1997: 42) which, however, is one of the main factors contributing to
successful innovation.
5. The legal, institutional and political environment for SMEs in Hungary
Hungary is far advanced in creating a legal and financial institutional frame further enhancing
SME development. In fact, Hungary was one of the first countries in Central Europe to create
a legal framework for private entrepreneurs and SMEs. Company and tax laws were adopted
in the late 1980s, a bankruptcy law was introduced as early as 1986. Already in 1988 the
‘Unified Entrepreneurship Law’ abolished decrees that discriminated against private firms, a
year later the Hungarian government introduced the Partnership Law allowing for up to 500
employees in private companies and introducing ownership forms such as joint stock
company, limited liability company and the limited company (Laky, 1991). The first years of
reform saw frequent changes in laws and regulations. For example, the revised version of the
bankruptcy law in the early 1990s led to a wave of legal bankruptcies, especially SMEs. The
reason was a regulation on compulsory bankruptcy linked to the inability to pay which forced
Hungarian firms to declare themselves bankrupt as soon as payment arrears exceeded 90 days,
even if their assets still exceeded their debts (Welter, 1994). This regulation was abolished
quickly because it overloaded the Hungarian courts.
New bankruptcy regulations in 1992 also forced banks to introduce stricter lending policies.
Consequently two commercial banks went bankrupt due to non-performing loans (Suzuki,
1996). Transformation of the banking sector started already in 1987, when a two-tier bank
system was introduced. Nowadays both the financial and legal framework are more or less in
place. Whilst tax policy still remains a priority for enterprise development, the current
emphasis for the Hungarian government includes bringing legislation and regulations into line
with EU standards in preparation for EU accession.
To assist business development the Hungarian government set up chambers of agriculture,
commerce and industry and crafts. The first law was passed after lengthy discussions in 1994,
introducing obligatory membership. In 1999 the ongoing discussions resulted in a
parliamentary resolution to merge the Chamber of Commerce and Industry and the Hungarian
Chamber of Crafts and to end compulsory membership from 2001 onwards (Institute for
Small Business Development, 1999). However, the line between chambers and business
associations in Hungary is blurred, impeding successful lobbying activities on behalf of SMEs

10
(OECD, 1996). The nowadays largest association, IPOSZ, which emerged as the association
of craft enterprises in 1990 from the previous compulsory Chamber of Crafts, aimed
unsuccessfully to become the current Chamber of Crafts. IPOSZ claims to be the domestic
interest representation of self-employed and micro entrepreneurs in Hungary. The second
largest business association is the National Association of Entrepreneurs and Employers
(VOSZ). VOSZ developed from the group of SMEs that belonged to the socialist Chamber of
Commerce (OECD, 1994). Moreover, numerous small associations exist with a few hundred
members, although, given their low political significance, these do not adequately represent
the interest of SMEs.
Mainly international donors initially were involved in creating a business support
infrastructure. In an effort to promote technological changes in SMEs the PHARE programme
for example supported the development of incubators, and a national business innovation
centre (Oakey, 1997). However, success has been modest so far, also due to a modest
response from SMEs (Lakalka, 1994). A lack of venture and risk capital add to this. Although
loans are available, including donor-financed credit schemes for the purchase of production
equipment by SMEs high interest rates might impede early stage innovators in realising their
ideas.
To encourage regional development of SMEs, PHARE was involved in creating of a network
of local enterprise agencies (LEAs) delivering technical assistance and consultancy. These
agencies are based on the UK model that has itself been critically reviewed over the past
years. They were set up as non-profit agencies through the Hungarian Foundation for
Enterprise Promotion (HFEP) which government intended to be the implementing agency for
the PHARE programme. However, Gibb and Haas (1996: 213) observed that “the Hungarian
experience would indicate that the models used, in so far as they relate to UK LEA
experience, are not always appropriate (...)”, identifying the sustainability of support
structures in Hungary as a critical factor. Although initially successful in supporting SMEs,
most centres turned to more profitable clients once EU funding stopped, because central and
local governments in Hungary did not take over. That meant that LEAs were forced to
become commercial rather quickly. Bateman (2000) refers to the example of an LEA in
Eastern Hungary which was established in 1990 and where already in 1991 managers were
heavily involved in private entrepreneurial activities to maximise their performance-related
income. Consequently LEAs are turning more and more into private business consultants for
large enterprises and do not support SMEs any longer.
During the first years of transition Hungarian SME policies could be characterised as a
piecemeal approach concentrating on direct support which was channelled through the
Hungarian Foundation for Enterprise Promotion. However, the agency apparently restricted
its activities to “providing administrative support for the disbursement of Phare and other
donor funds” and did not take an active role in designing SME policies (EU 1999: 8).
Furthermore, although a special SME department was set up in the Ministry of Industry,
Trade and Tourism, its impact on policies relevant for SMEs was limited. The main reasons
were a lack of awareness and vision at government level concerning the role and contribution
of SMEs as well as their neo-liberal attitude towards SME promotion (Lageman et al., 1994).
In order to co-ordinate the various ministries, the Hungarian government established an
Enterprise Development Council in 1994. However, Tibor (1998: 243) concludes: “The

11
declared support for enterprises was not concomitant with a coherent economic policy
concept or a constructive and consistent effort to develop a suitable institutional framework or
to put in place operational control of already existing institutions. For all the ministries and
foundations responsibles, it was a period of ‘anything goes’ under the guise of enterprise
advancement.”
Preparations for the EU accession finally resulted in the development of a national strategy
for SME development. In December 1998 the Hungarian government passed a resolution
introducing a medium-term strategy for SME development and bundling all support
programmes (Ministry of Economic Affairs, 1998). As in Western economies, the
contributions of SMEs to employment and growth are the underlying rationale of this
strategy. The target groups are micro enterprises, most of which are family businesses, small
firms employing 10-49 persons, and medium enterprises with up to 250 employees. As of the
year 2000, funding is secured by a separate budget item within the central budget (EU &
Government of the Republic of Hungary, 2000). However, the overall objectives of SME
support are not clear-cut. For example, government intends to strengthen existing SMEs and
support innovation as well as their professional and technical re-organisation, but it also aims
at promoting entrepreneurship of disadvantaged groups. Both aims require different strategies
which eventually might result in potential conflicts between social and economic policies in
supporting SMEs. Nevertheless, the strategy was a necessary step towards the creation of
formal requirements which are necessary when developing a co-ordinated and coherent
approach for SME policies.
6. Conclusion: Hungarian SMEs – fit for Europe?
The development of Hungarian SMEs has been progressing remarkably fast since the
beginning of transformation although the rates of start-ups have been slowing down over the
past years. A considerable part of entrepreneurial activities is, however, only carried out part-
time. In comparison to the EU, enterprise sizes are still distorted in favour of micro
companies with the medium enterprise class more or less lacking. This trend could prove
critical in the long run regarding the sustainability of the SME sector. Sectoral distribution
generally follows the initial transformation pattern, with SMEs dominating in tertiary sectors
and low numbers of start-ups in secondary sectors. Compared to the EU, there is still a
considerable gap, indicating further possibilities for SME development. Regional patterns still
show a distorted structure, with SME clusters in dynamic regions. However, this is a picture
also common in European Union member countries.
Piasecki (1992: 239ff.) identified different stages of SME development in transition
economies which assist in explaining the Hungarian patterns during late socialism and the
transition towards a market economy. The ‘initial stage of entrepreneurship development’
occurred already during the 1980s with the first reforms, whilst the ‘period of
entrepreneurship explosion’ was triggered by the elimination of legal barriers such as licenses
impeding market entry in the late 1980s and early 1990s, plus niche markets during the early
years of transition. The next stage of ‘market self-regulation’ which is characterised by an
increasing enterprise turnover and rapidly changing branch structures in the SME sector could
be observed from 1993 onwards, when the growth rates of SMEs started declining. Finally,
the current state of SMEs in Hungary, i.e., the dominance of trade and service firms and the

12
lack of middle-sized enterprises, would indicate the beginning stage of ‘restructuring’ in SME
development which mainly emphasises qualitative changes in the SME sector such as
enterprise growth and innovation.
All in all, SMEs made a significant contribution to economic recovery in Hungary. The drop
in national economic production and unemployment would have been much higher without
the initial start-up boom. Nowadays, Hungarian SMEs account for a major part of national
production and employment. However when discussing SMEs’ further role in employment
the important issue of job quality has to be taken into account. This concerns the type of jobs
created by SMEs in terms of working conditions, wages and longer-term perspectives – a
question with implications for politics which has also been neglected until recently in Western
countries.
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