Strategy for the Development of Small anD meDium-SizeD enterpriSeS by lcy20702

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									Strategy for
the Development
of Small anD
meDium-SizeD
enterpriSeS

2007–2013
       Strategy
for the Development of
Small anD meDium-SizeD
      enterpriSeS

       2007–2013
 Strategy for the Development of Small and Medium-sized Enterprises




Foreword



In Hungary, a very intense period of catching-up has just come
to an end: between 1995 and 2005-2006 we managed to redu-
ce the economic gap vis-à-vis the European Union. Neverthe-
less, compared to the other countries in the region, our growth
significantly slowed down already in 2006 and, along with this,
also our competitiveness gradually changed for the worse.

This created a sort of loss of trust on international level, as well as in the Hungarian bu-
siness sector. Now, after the first important correction period related to the state budget
imbalance, the question arises: how can we achieve growth again? How will we reach
a sustainable, high growth rate in Hungary again?

It is a serious challenge for us to answer the following questions: what will Hungary’s
middle term future look like, how can we achieve growth again, how can we regain our
previous position in the region?

I believe this goal cannot be accomplished without well-functioning economic enterpri-
ses as they play an extremely important role in the creation of jobs and in the payment
of taxes all over the country.

It is the development strategy of small and medium sized enterprises, established as a
result of long discussions and negotiations, that facilitates the achievement of this goal.
Nevertheless, the “birth” of this document should not be the end of this process.

During the negotiations, each of the parties expressed its demand for the consistent
implementation of what had been agreed upon. To be able to achieve our aims, we need
teamwork and cooperation among the public sphere, the organisations supporting the
enterprises and the enterprises themselves.

I would like to thank you in advance for getting acquainted with the details of the stra-
tegy and I truly believe that we will also be partners in implementing it.




                                                                             Csaba Kákosy
                                                                                  Minister
                                   SUMMARY



The present document rests on various other documents approved by the Government,
which are related to the development of small and medium-sized enterprises (SME
Development Framework, In Tune with Business Programme, Mid-term Science,
Technology and Innovation Policy Strategy, Mid-term External Economy Strategy for
Hungary), observes the framework of the Convergence Programme and draws up at
government level an SME development strategy for the period 2007-2013.

Four major groups of factors (pillars) determining the state of small to medium-sized
enterprises are the following:
• Regulatory environment,
• Financing,
• Knowledge (entrepreneurial skills, human resources) and
• Development of entrepreneurial infrastructure.


Each of the objectives set in these four major areas of intervention – supportive regulatory
environment, enlargement of financial resources, development of entrepreneurial
knowledge and infrastructure – serve the core objective of the strategy, which is the
improvement of the economic performance of small and medium-sized enterprises. When
setting the objectives it was necessary to observe that the economic development of
Hungary can only take place in a healthy structure if there is palpable improvement in the
performance of the whole spectrum of small and medium-sized enterprises. Horizontal
goals of the strategy are expanding employment, improving productivity, integration into
the global economy and more efficient inter-company cooperation.
 Strategy for the Development of Small and Medium-sized Enterprises




In the course of planning and implementing the strategy the following basic principles
were identified:

Functional approach: When developing policies, functions should be accepted as starting
points instead of organisations. Functional approach seeks the services development of
which will produce results for any kind of enterprise.

Sustainability: The principle of sustainability attempts to reduce the high dependence
of programmes on donors. Self-sufficiency is an incentive and measure of customer-
focused, useful services.

Institutional development, capacity building: Development of structures capable of
operating self-sufficiently.

Coordination based on market mechanisms: Market coordination, competition and
enforcement of the efficiency constraint allow for the growth of the production of added
value to become the measure of success, as enterprises are only in the position to
expand their employment, be competitive and operate in a stable way if their income
production is on the increase.

Our objective is that state interventions can contribute to the emergence of lacking or
unsatisfactory markets and can result in growing efficiency of development programmes
as well as a growing number of eligible enterprises.

The following groups of instruments serve the achievement of the objectives set:
• Measures aimed at the development of a supportive regulatory environment
  (measures to improve the business environment)
• Fixed purpose state aids (tenders with EU and domestic resources)
• State-supported financial instruments (financial schemes, e.g. micro-credit,
  guarantee, capital schemes etc.)

The strategy for the development of small and medium-sized enterprises was accepted
at the government session on 10 October 2007.
                                              Content



1.         INTRODUCTION              . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
1.1.       Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        . . . . . . . . . . . . . .    13
1.1.1.     Motives of this Document . . . . . . . . . . . . . . . . . . . . . .              . . . . . . . . . . . . . .    13
1.1.2.     The Mandate Given to Preparation of the Strategy . . . .                          . . . . . . . . . . . . . .    14
1.1.3.     The Organisational Framework of Strategy Formulation                              . . . . . . . . . . . . . .    14
1.2.       the Strategic planning process . . . . . . . . . . . . . . . . . .                . . . . . . . . . . . . . .    14
1.2.1.     The Strategic Planning Process and its Schedule . . . . .                         . . . . . . . . . . . . . .    14
1.2.2.     Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     . . . . . . . . . . . . . .    15

2.         SITUATION ANALYSIS                  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     17
2.1.       approach, methodological introduction                       . . . . . . . . . . . . . . . . . . . . . . . . .     17
2.2.       an overview of the Sector of Small and medium-sized enterprises . . . .                                     .     1
2.2.1.     A General Description of the Sector of Small and Medium-sized Enterprises                                   .     1
2.2.2.     EU Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           .     20
2.2.3.     Development of Income Processes of Enterprises . . . . . . . . . . . . . . . . . .                          .   . 21
2.2.4.     Enterprises in a Regional View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              .     24
2.2.5.     Trends in Some Factors of Competitiveness . . . . . . . . . . . . . . . . . . . . . .                       .     26
2.2.5.1.   Division of Labour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        .     26
2.2.5.2.   Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        .     26
2.2.6.     Groups of Small Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               .     27
2.2.7.     Factors Impeding Operations of Enterprises . . . . . . . . . . . . . . . . . . . . . .                      .     29
2.3.       analysis according to pillars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             .   . 31
2.3.1.     Structure of the Situation Analysis regarding the SME-sector . . . . . . . . .                              .   . 31
2.3.2.     Regulatory Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              .     32
2.3.3.     Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     .     35
2.3.4.     Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       .     42
2.3.5.     Entrepreneurial infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              .     46
2.3.5.1.   Use of Information and Communication Technologies (ICT) . . . . . . . . . . .                               .     46
2.3.5.2.   R&D Activity and Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               .     4
2.3.6.     A Summary of the problems of the SME Sector . . . . . . . . . . . . . . . . . . .                           .     52
2.4.       experiences with enterprise development in the previous period . . . . . .                                  .     52


                                                             
2.4.1.     Hungarian programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                . . . . .   52
2.4.2.     Share of Small and Medium-Sized Enterprises from EU Co-financed
           Tender Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        . . . . .   53

3.         SWOT ANALYSIS               . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   57
           Strengths . . . .     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
           Weaknesses . .        . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
           opportunities         . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   59
           threats . . . . .     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   59

4.         FUTURE VISION (TARGET STATE)                          . . . . . . . . . . . . . . . . . . . . . . . . . . . .   60

5.         STRATEGIC DIRECTION                   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   62
5.1.       principles of intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            . . .   62
5.1.1.     Main intervention principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              . . .   63
5.1.2.     Expected advantages of implementation of the intervention principles                                    . . .   64
5.2.       intervention areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          . . .   64

6.         TARGETS         . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   66
6.1.       approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      . . . . .   66
6.1.1.     Identification of Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           . . . . .   66
6.1.2.     Identification of Target Values . . . . . . . . . . . . . . . . . . . . . . . . . . . .             . . . . .   66
6.2.       Strategic target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        . . . . .   6
6.3.       Comprehensive objectives (pillars) . . . . . . . . . . . . . . . . . . . . . . . .                  . . . . .   6
6.3.1.     Elaboration of a Supportive Regulative Environment . . . . . . . . . . . .                          . . . . .   6
6.3.1.1.   Competitive Share of Public Burden . . . . . . . . . . . . . . . . . . . . . . . .                  . . . . .   6
6.3.1.2.   Decreasing Administrative Burdens Resulting From State Regulation                                   . . . . .   69
6.3.1.3.   Strengthening of Economic and Legal Security, Fair Competition . . .                                . . . . .   69
6.3.2.     Extension of Financing Resources . . . . . . . . . . . . . . . . . . . . . . . . .                  . . . . .   70
6.3.2.1.   Extending the Range of Higher Financing Risk Products . . . . . . . . .                             . . . . .   70
6.3.2.2.   Increasing the Accumulation of SMEs . . . . . . . . . . . . . . . . . . . . . .                     . . . . .   70
6.3.2.3.   Improvement of SMEs’ Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . .                  . . . . .   71
6.3.3.     Development of Entrepreneurial Knowledge . . . . . . . . . . . . . . . . . .                        . . . . .   71
6.3.3.1.   Extending the Knowledge of Entrepreneurs and Employees . . . . . . .                                . . . . .   71
6.3.3.2.   Development of Entrepreneurial Skills . . . . . . . . . . . . . . . . . . . . . .                   . . . . .   72
6.3.4.     Development of Entrepreneurial Infrastructure . . . . . . . . . . . . . . . .                       . . . . .   72
6.3.4.1.   Development of Business and R&D Infrastructure . . . . . . . . . . . . . .                          . . . . .   72
6.3.4.2.   Development of ICT Infrastructure and Use . . . . . . . . . . . . . . . . . . .                     . . . . .   73
6.4.       horizontal targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          . . . . .   73
6.4.1.     Increasing Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           . . . . .   73
6.4.2.     Expanding Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                . . . . .   74
6.4.3.     Integration Into Global Economy . . . . . . . . . . . . . . . . . . . . . . . . . .                 . . . . .   74
6.4.4.     More Efficient Inter-Company Cooperation . . . . . . . . . . . . . . . . . . .                      . . . . .   75




                                                             9
7.       INSTRUMENTS              . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     76
7.1.     instruments Serving the establishment of a Supportive regulative
         environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          .   77
7.1.1.   Simplified Company and Tax Administration . . . . . . . . . . . . . . . . . . . . .                          .   77
7.1.2.   Economic and Legal Security, Favourable Financial Operational Conditions                                     .   7
7.1.3.   Accessible Business Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  .   79
7.1.4.   Fair and Transparent Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   .   79
7.2.     instruments for the expansion of financing resources . . . . . . . . . . . . . .                             .   0
7.2.1.   Microfinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         .   1
7.2.2.   Guarantee Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              .   1
7.2.3.   Capital Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            .   1
7.2.4.   Investment Promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             .   2
7.3.     instruments for the improvement of entrepreneurial Knowledge . . . . . .                                     .   2
7.4.     instruments for the improvement of entrepreneurial infrastructure . . . .                                    .   4
7.4.1.   Business Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            .   4
7.4.2.   ICT Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         .   5
7.4.3.   Promoting the Pursuance of Innovative Activities . . . . . . . . . . . . . . . . . .                         .   6
7.5.     enterprise Development instruments aiming at the realisation
         of horizontal objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             .   6
7.5.1.   Direct Job Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          .   6
7.5.2.   Promoting Appearance in External Markets . . . . . . . . . . . . . . . . . . . . . .                         .   7
7.6.     the Connection and Synergy of programme elements . . . . . . . . . . . . . .                                 .   
7.7.     Small and medium-Sized enterprise Development instruments by Size
         of enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        .   

8.       FINANCIAL PLAN               . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     90
8.1.     financing the establishment of a Supportive regulatory environment                                     . . .     91
8.2.     funding the expansion of financial resources . . . . . . . . . . . . . . . . . .                       . . .     92
8.3.     funding entrepreneurial Knowledge Development . . . . . . . . . . . . . .                              . . .     93
8.4.     funding entrepreneurial infrastructure Development . . . . . . . . . . . .                             . . .     94

9.       IMPLEMENTATION AND MONITORING                                  . . . . . . . . . . . . . . . . . . . . . . .     95
9.1.     implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         . . . . . . . . .     95
9.1.1.   Implementation of Measures Relating to the Establishment of
         a Supportive Regulatory Environment . . . . . . . . . . . . . . . . . .                    . . . . . . . . .     95
9.1.2.   Realisation of the Extension of Financing Resources . . . . . . . .                        . . . . . . . . .     97
9.1.3.   Implementation of Fixed State Support Programmes Aiming at
         Knowledge and Infrastructure Development . . . . . . . . . . . . . .                       . . . . . . . . .     99
9.2.     monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     . . . . . . . . . 100
9.2.1.   Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     . . . . . . . . . 100
9.2.2.   Measuring Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           . . . . . . . . .   101
9.2.3    Data Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      . . . . . . . . .   101
9.2.4.   Reports, Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             . . . . . . . .   . 103
9.3.     partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      . . . . . . . .   . 103



                                                         10
10.       STRATEGIC CONSISTENCY AND COHERENCE                                           . . . . . . . . . . . . . . . . .    106
10.1.     the Consistency of the Strategy                   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    106
10.2.     the Coherence of the Strategy .                   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    . 10


11.       APPENDIX           . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       109
11.1.     Key european union experiences of Small and medium-Sized enterprise
          Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              . 109
11.1.1.   The European Union Strategy and Specific Recommendations for
          Boosting the Competitiveness of Small and Medium-Sized Enterprises . . .                                         . 109
11.1.2.   State and Outcome of State Subsidies in the European Union . . . . . . . . .                                     . 112
11.2.     Cause–effect analysis of the Sme sector . . . . . . . . . . . . . . . . . . . . . . . .                          . 120
11.3.     areas of intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                . 124
11.4.     Set of objectives for the small and medium-sized enterprise development
          strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   .   12




                                                              11
1.




                                            INTRODUCTION



     In accordance with the European Charter for Small Enterprises1, the Community Lisbon
     Agenda2 and the Commission’s communication3 entitled Modern SME Policy for Growth
     and Employment, and aimed at the implementation of the Agenda, the Hungarian
     Government gives special priority to Hungarian small and medium-sized enterprises,
     due to the following facts:

     •   They are important sources of job creation and business innovation. The creation of
         a new economic system for Europe can only be successful if small enterprises are
         assigned a special role.

     •   The competitiveness of small and medium-sized enterprises fundamentally influences
         the performance of the whole economy.

     •   Small enterprises are the ones most sensitive to changes in the business environment
         and to rises in administrative burdens, and they are the fastest to react to advantageous
         opportunities.

     •   Small enterprises are important driving forces of innovation and employment, and also
         greatly facilitate local and social integration.




     1 The European Charter for small enterprises was published as Appendix III to the Presidency Conclusions of the Santa Maria da
       Feira European Council staged on 19-20 June 2000.
     2 Communication of the Commission: Common Actions for Growth and Employment: the Community Lisbon Programme,
       COM(2005)330.
     3 Communication of the Commission: Implementing the Community Lisbon Programme - Modern SME Policy for Growth and
       Employment, COM(2005)551.




                                                                    12
    Strategy for the Development of Small and Medium-sized Enterprises
                                                                                            1.

1.1. Background

1.1.1. motives of this Document

Between 2003 and 2006 the mid-term SME development strategy of the Hungarian
Government was the Széchenyi Enterprise Development Programme (SZVP) adopted
by Government Decision 1213/2002. (XII. 23.).

In line with EU SME development objectives, the Ministry of Economy and Transport
began to formulate a new policy for the development of micro, small and medium-
sized enterprises in 2005 for the period 2007-2013, observing the existing Hungarian
and international experience and practices. With a view to maximum exploitation of
EU development funds to be opened up during the EU budgetary period of 2007-2013,
the policy was finalised with the adoption of the New Hungary Development Plan and
the formulation of the Operational Programmes, mainly the Economic Development
Operational Programme. The policy pertaining to these development instruments
was adopted by the Government at its session on 7 February 2007, with the title SME
Development Framework.

The formulation of an SME development framework was justified by two important factors:
• The competitiveness of small and medium-sized enterprises fundamentally influences
  the performance of the whole economy and employment as well.
• A thorough foundation was needed for enterprise development priorities and
  measures of the National Strategic Reference Framework of Hungary for the period
  2007–2013.

One of the core elements of the SME development policy is the improvement of the
business environment. Therefore, in order to ”rev up” this environment a separate
scheme was set up by the Ministry of Economy and Transport, with the title “In Tune with
Business”, in accordance with the key objectives of the SME development framework.
This scheme was approved by the Government at its session on 25 April 2007, in a joint
proposition with the Deregulation Programme of the State Reform Committee, with the
following title: Proposition on the Government’s Deregulation Programme and Measures
of the “In Tune with Business” Programme, Serving the Improvement of the Business
Environment.

In order to create a knowledge-driven economy in Hungary, and within that, to set
innovative small and medium-sized enterprises on a growth track and strengthen their
competitiveness, at its session on 2 March 2007 the Government adopted its mid-term
science, technology and innovation-policy strategy. Steps that also provide incentives to
international trade relations and export activities of Hungarian small to medium-sized
enterprises are summarised in the Government’s mid-term external economy strategy
adopted at its session on 27 July 2005.




                                            13
1.                                       INTRODUCTION




     The programme bearing the title “For a Successful, Modern and Fair Hungary (2006–2010)”
     adopted by the Government of the Republic of Hungary in 2006 addresses developing
     Hungarian enterprises in a separate chapter. Within this chapter, as well as on various
     points throughout the programme, special emphasis is placed on the development of
     small and medium-sized enterprises. Through the implementation of this framework, the
     SME development policy contributes to the improvement of competitiveness and the
     promotion of employment, in line with basic objectives of the New Hungary Development
     Plan as well.


     1.1.2. the mandate given to preparation of the Strategy

     The government strategy for the development of small and medium-sized enterprises
     was included in the Government’s agenda for the 2nd term of 2007 on the basis of
     Appendix 3 of the July 2007 coalition agreement (Reforms Adopted by the Coalition
     Parties), and was drawn up in accordance with MoET policies on the currently valid
     strategy development methodology and the order of procedures of the Ministry. The
     present document is a draft for the long-term strategy of the Hungarian Government,
     aimed at the development of small and medium-sized enterprises.


     1.1.3. the organisational framework of Strategy formulation

     In the first place, the Ministry of Economy and Transport is responsible for the formula-
     tion of the strategy. Preparation of the document was coordinated within the economic
     portfolio by the Department for Enterprise Finance, with the involvement of the Business
     Environment Development, the R&D as well as the Infocommunications and E-economy
     Departments. Methodological support to development of the strategy was provided by
     the MoET Strategy Department and by staff at the EU and Governance Group of KPMG
     Consulting Ltd.



     1.2. The Strategic Planning Process

     1.2.1. the Strategic planning process and its Schedule

     The Government Proposal on the SME development framework for 2007–2013, serving as
     the basis for the present strategy, was drawn up in 2005 after broad social debate and
     negotiations. In the first round the social discussion of the scheme took place in the frames
     of the Enterprise Development Council and the National Reconciliation Council. Finalisation
     of the strategic document related to the instruments started in October 2006 and took place
     jointly with the adoption of the New Hungary Development Plan and the formulation of
     the Operational Programmes, mainly the Economic Development Operational Programme.
     During social negotiations, the document was sent to partner organisations and enterprise
     development organisations, and was also disclosed on the MoET website, where it received
     primarily positive feedback. The scheme was discussed by the Economic Committee of the


                                                  14
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                               1.
National Reconciliation Council on 20 December 2006, and by the plenary on 26 January
2007. The scheme was included in the Government’s working agenda for the first term of
2007 and formed a part of the Government’s reform programme adopted on 7 February
2007. The Government accepted the scheme at its session on 7 February 2007. Pursuant to
the proposal for decision the scheme was disclosed on the MoET website.

The “In Tune with Business” programme is likewise part of the Government’s reform
agenda. In the field of development of the business environment we asked major profes-
sional and interest representation organisations to participate in the social dialogue (230
organisations received requests for their opinions on the scheme). In the case of some
partners of special importance, personal contact was established (National Association
of Entrepreneurs and Employers (VOSZ), Hungarian Chamber of Commerce and Industry
(MKIK), National Federation of Traders and Caterers (KISOSZ), Joint Venture Association,
Hungarian Association of IT Companies (IVSZ), Hungarian Association of Craftsmen’s
Corporations (IPOSZ), Hungarian Industrial Association (OKISZ), Confederation of
Hungarian Employers and Industrialists (MGYOSZ) and the Hungarian European Business
Council). Nearly 400 propositions were received, more than half of which commented on
the simplification of company and tax administration. In the course of evaluation, these
propositions were discussed with the competent MoET departments and relevant line
ministries, and propositions were selected which might, when implemented, bring about
the largest-scale savings and economic profit, primarily in the field of administrative
burdens levied on entrepreneurs. Up to 33 propositions were devised this way and
discussed further with relevant bodies responsible for legislation, among them the
Ministry of Justice and Law Enforcement (IRM), the Ministry of Finance (PM) and the
State Reform Committee (ÁRB) coordinating at government level the steps to improve
business environment.

 Beyond its basis formed by the SME development framework, and to the additional
“In Tune with Business” programme, the present SME development strategy rests on
 various Government-approved documents pertinent to SME development (mid-term
 science, technology and innovation policy strategy, mid-term external economy strategy
 of Hungary) and as its state of readiness allows, it gives consideration to the White Paper
 on Information Society too.

The social dialogue on the SME development strategy was also performed in the frames
of the Enterprise Development Council and the National Reconciliation Council. The
proposal was discussed and equally supported by the Enterprise Development Council
on 4 October 2007, the Economic Committee of the National Reconciliation Council on
3 October 2007 and the Plenary of the latter body on 5 October 2007.


1.2.2. Definitions

By the term small and medium-sized enterprises we understand the definition set out in Act
XXXIV of 2004 on small and medium-sized enterprises and supporting their development,


                                             15
1.                                       INTRODUCTION




     which conforms as of 1 January 2005 to European Commission recommendation 2003/361/
     EC, issued on 6 May 2003.

     As of 1 January 2005 the amendment of binding SME definitions subject to EU legislation
     necessitated an increase in the balance sheet footing and the annual net sales revenues
     of micro, small and medium-sized enterprises. Micro and small enterprises also differ
     as to financial figures. Employee headcount categories remained unchanged. The so-
     called independence criteria did not change, either. This is to say that state, municipality
     or big company shares exceeding 25% is ground for exclusion from the group of SMEs,
     with ownership of institutional investors as an exception, under unchanged terms.

     The consolidation approach has emerged, as a result of which the relationship of SMEs
     to each other must also be examined. On this basis independent, partner and related
     enterprises must be distinguished, which allows for a more detailed examination of
     the independence criterion. Additionally to institutional investors, being an exception
     when it comes to the issue of ownership, other investors are also exceptional when the
     independence criterion is applied.

     Accordingly, as of 1 January 2005 small and medium-sized enterprises are defined the
     following way:



       “(1) An enterprise will qualify as SME if its total headcount is less than 250, and its
            annual net revenue does not exceed the HUF equivalent of EUR 50 million, or
            its balance sheet total does not exceed the HUF equivalent of EUR 43 million.
        (2) Within the SME category, the following will qualify as small enterprise: total
            headcount under 50, and annual net turnover or balance sheet total does not
            exceed the HUF equivalent of EUR 10 million.
        (3) Within the SME category, the following will qualify as micro enterprise: total
            headcount under 10, and annual net turnover or balance sheet total does not
            exceed the HUF equivalent of EUR 2 million.
        (4) An enterprise will not qualify as SME if the state or the local government
            owns, directly or indirectly, a share in it exceeding – on the basis of the capital
            or the voting rights – separately or jointly 25%.”



     The Act requires that in data provisions of the Hungarian Central Statistical Office and
     the Hungarian Tax and Finance Control Administration SMEs must be differentiated
     according to headcount.




                                                   16
                                                                                             2.




                       SITUATION ANALYSIS



2.1. Approach, methodological introduction

This situation analysis only summarises the major statements which are important from
the point of view of providing a foundation to the development strategy concerning
small and medium-sized enterprises. The aim of the situation analysis is to examine
trends, development directions and tendencies in the sphere of small and medium-sized
enterprises. We do not attempt to present a fully detailed picture of the state of small
and medium-sized enterprises. The ongoing work of analysing the financial state and
performance of Hungarian enterprises is served by a monitoring system, in place for the
past ten years. The main point of this monitoring system is that it collects and organises
all the data and information about the sector of small to medium-sized entrepreneurs.
The system is partly based on foreign and Hungarian sources of data (HCSO, Tax
Authority, Central Bank, Financial Supervisory Authority, Ministry of Finance, data from
organisations supporting enterprise development, the European Union, OECD, EBRD,
World Bank etc. databases) and on a special way of processing of these data, and in
part it is based on representative data obtained by means of own surveys. On the basis
of data from the monitoring system, our other publications provide detailed analyses.
These are the annual reports on the state of small and medium-sized enterprises, which
have been prepared since 1996, bi-annual reports for the Parliament on the state of
this sector, and our analysis “Access of small and medium-sized enterprises to financial
resources, survey of market deficiencies”, drawn up early 2007 to provide the foundation
for financial measures of the Economic Development Operational Programme. While
carrying out the situation analysis we used available strategies of professional areas
and researchers’ analyses concerning SMEs.

The situation analysis is therefore not based on individual surveys but on an ongoing and
regular work of analysis.

The Act on small and medium-sized enterprises and the promotion of their development
requires that in data provisions of the Hungarian Central Statistical Office and the
Hungarian Tax and Finance Control Administration SMEs must be differentiated according


                                            17
2.                                           SITUATION ANALYSIS




     to headcount. Thus in the course of situation analysis, when we work with tax return data,
     distinctions between enterprises are made on the basis of employee headcount in groups
     of 0 to 1, 2 to 9, 10 to 49 and 50 to 249.



     2.2. An Overview of the Sector of Small and Medium-sized Enterprises

     2.2.1. a general Description of the Sector of Small and medium-sized enterprises

     Hungarian small and medium-sized enterprises proceeded over the past one and a
     half decades on a road typical of private sectors of transitional economies. A group
     of entrepreneurs with little experience, lacking information on rules of the market
     economy and thus not knowing their way has by now developed into a sector of small
     and medium-sized enterprises, which is building a network of relationships, entering
     into various forms of cooperation, and narrowing the gap between themselves and
     small businesses of developed countries on many areas (financing, self-organising,
     management, infocommunications etc.)

     The Hungarian SME sector has now become very similar to sectors of small enterprises
     in less developed old EU Member States and in newly acceded ones. A large number
     of small enterprises operate in the economy. The average size of enterprises is below a
     staff of 5.

     Structural features of small to medium-sized enterprises changed only slightly on most
     areas. Typical of these businesses are high labour and low capital intensity. They have a
     bigger share in employment than in sales revenues or income production.

      major figures characterising the state of enterprises in 2005, according to size category (%)
                                     0–1      2–9       10–49    50–249                           250+
      figure                                                                        Sme total                total
                                  employees employees employees employees                       employees
      Number of enterprises*         75.6         20.2          3.6         0.6        99.9            0.1   100.0
      Employees*                      6.0         21.9        21.6         19.5        6.9           31.1   100.0
      Sales revenues                  7.4         14.4        19.7         1.1        59.6           40.4   100.0
      Export                          5.9          5.5        10.3         13.5        35.3           64.7   100.0
      Added value                     6.0         10.9        16.4         1.7        52.0           4.0   100.0
      Equity                          .9         11.9        14.6        15.         51.2           4.   100.0
     * including the financial sector.
      Source: HCSO in the case of sales revenues and added value figures, MoET calculations for the rest
      (HCSO and MoET calculations show a slight difference due to methodology and the time of creation of the
      databases.)


     The balance of setting up and termination of enterprises is slightly positive in the long
     run, which means that the total number of enterprises is somewhat on the increase. In
     the long run, the number of enterprises is not likely to grow further significantly in the
     Hungarian economy, while their average size and performance will probably improve.


                                                           1
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                                2.
The number of registered (market-focused) enterprises was 967,32 in 2005 according to
the HCSO register of business associations. A considerable share of registered enterprises,
however, does not actually operate. The number of operating enterprises was 625,000
in 2000 and 70,000 at the end of 2005, under the new EU methodology.4 The number
of enterprises fell by 500, which is 0.1%, between 2004 and 2005. It exceeded the 2000
level by 2,500, which is 13.2%. Within operating enterprises, the rate of companies and
partnerships is gradually increasing, while the number of sole proprietorships has been
slowly deteriorating over the past years. In 2004 the rate of sole proprietorships amounted
to 53%. Among companies and partnerships the number of limited partnerships and
limited liability companies shows significant growth. These two forms of business include
95% of all companies and partnerships.

 the number of operating enterprises in 2001-2005 according to headcount category (pieces)
 headcount category                    2001               2002              2003               2004              2005
 0–1 employees                       443,503            47,35           40,564            40,066            477,232
 2–9 employees                       169,3            173,115           16,536            193,461            195,113
 10–49 employees                       26,157            26,29             27,72            2,06             29,507
 50–249 employees                       5,337             5,006              5,015              5,02             4,90
 250 employees and above                1,046             1,003                95                946               924
 enterprises total                   645,881            693,788           700,855            708,307            707,756
 Source: Demography of Enterprises 2005 (HCSO 2007)

Most enterprises operate in the umbrella sector comprising real estate trading, real estate
renting, IT and economic as well as business-support services. These are followed by
trading enterprises, then by the processing and construction industries. These were the
most numerous branches, as they comprised more than three-thirds of all enterprises
in 2005.

Small and medium-sized enterprises play a highly significant role in employment. Within
the corporate sector, more than two-thirds of total employment is made up by small
to medium-sized enterprises. The SME sector is the only major part of the Hungarian
economy which was able to produce net employment growth over the past fifteen years.
The employment structure of small and medium-sized enterprises is regionally much
more balanced than that of big companies. Their impact on the rate of employment
shows a smaller difference both in a Budapest-country comparison and a comparison
between country regions than the difference measured at big companies.

Primary owners of micro and small enterprises are typically Hungarian individuals,
while medium-sized ones are owned by Hungarian partnerships and big companies are
typically owned by foreigners. The share held by big companies from the total capital

4 In order to implement a harmonised data collection, Eurostat elaborated a single methodology applied in all participating
  countries. The enterprise demographic data collection performed on the basis of the single methodology provides comparative
  figures on operating enterprises, new and terminated enterprises and on the survival of new enterprises. An enterprise is
  considered to be operating in a given year if it had sales revenues or had at least one employee.




                                                              19
2.                                     SITUATION ANALYSIS




     of the business sector is 45–51 per cent (2001–2005), the share of medium-sized ones is
     17–19 and that of micro and small enterprises is 32–36 per cent. Capital concentration is
     therefore high, but not on the increase any more.

     Investments made by companies and partnerships fluctuated between 2001 and 2005.
     Compared to the previous years, they respectively decreased in 2002 and 2004 and
     increased in 2003 and 2005. Investments made by micro, small and medium-sized
     enterprises are largely similar, while those of big companies are much bigger, though
     showing a downward trend. Investment activity rises sharply if we proceed from the
     smallest enterprises towards bigger ones and its rate appears stable within each size
     category. 32–40 per cent of enterprises with 0–1 employees, and 5–90 per cent of big
     companies made investments each year.


     2.2.2. eu Comparison

     Motivating small and medium-sized enterprises has been paid special attention in the
     European Union since the mid-190s. Both official documents of the Community and
     policies of the individual Member States emphasise that SMEs demand special attention
     and support, so that they are able to overcome competitive disadvantages compared
     with big companies. Accordingly, SME policies of the EU and its Member States show a
     high degree of similarity regarding their sets of objectives and instruments.

     A community document of high importance regarding support to small and medium-
     sized companies is the European Charter of Small Enterprises, which determines the
     place and role of this sector in the European economy and society, and prescribes a set
     of instruments for Member States, in order to develop these businesses.

     The visions for developing small and medium-sized enterprises underwent significant
     changes from 2005. In November 2005 the SME-strategy of the European Union was
     revised. The communication “Modern SME policy for growth and employment” provides
     a single framework to various enterprise-related policy instruments. Its objective is to
     uphold the “Think Small First” principle in all EU policies. In line with the new challenges,
     the European Commission modernised its state aid policy, main elements of which
     are less and better targeted state aid, a refined economic approach, more efficient
     procedures, improved implementation, higher predictability and enhanced transparency,
     and the sharing of responsibility between Commission and Member States. As a base
     rule, the European Union prohibits direct individually given aids and allows that only in
     special cases. Existing regulation and amendments pertinent to support motivate the
     application of horizontal policies to a growing extent, and within that, allow for direct
     support of small enterprises.

     99.% of enterprises operating in the European Union (EU-25) are small to medium-sized
     enterprises. Their number may be estimated around 23 million, they provide 75 million
     jobs and account for 57% of EU GDP. 91.5% of all enterprises are micro enterprises of 1 to


                                                  20
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                              2.
9 employees, 7.3% are small, 1% are medium-sized and hardly more than 0.2% belong
to the category of big companies. (Our figures about Hungary slightly differ from the EU
figures due to methodological differences, but we have not changed the table, which
includes the latest data available at the end of 2006.)

 Some comparative figures of enterprises in the european union (eu-25) and hungary (%)
 eu-2003, hu-2003                          micro         small   medium     Sme total      large      total

 Distribution of the number      EU-25     91.5           7.3      1.1        99.          0.2       100.0
 of enterprises                       HU   94.7           4.4      0.7        99.          0.2       100.0

 Distribution of the number      EU-25     29.          20.     16.5        67.1         32.9       100.0
 of employees                         HU   35.9          1.6     16.2        70.7         29.2       100.0

 Distribution of sales           EU-25     19.4          19.3     19.2        57.9         41.9       100.0
 revenues                             HU    21.1         19.0     1.6        5.7         41.2       100.0

 Distribution of                 EU-25     20.5          19.1     17.        57.4         42.7       100.0
 added value                          HU   17.2          16.2     1.4        51.         4.2       100.0
 Source: SMEs and Entrepreneurship in the EU, Statistics in focus 24/2006

International experience in the field of SME-development is presented in more detail in
the Appendix.


2.2.3. Development of income processes of enterprises

The difference between economic performance of big, medium-sized and small com-
panies has not changed significantly over the past years. All in all, differences between
the performances of enterprises of various size categories are characterised by a
stabilisation of the proportions established in the late nineties.

 Contribution to gross added value by corporate headcount category, calculated from data of sole
 proprietorships and enterprises with double-entry bookkeeping (2001–2005) (%)
                              2001            2002               2003            2004              2005
 0–1 employee*                  5.9                7.7             5.5               5.1             6.1
 2–9 employees**               10.4            12.1               11.2            10.2              10.2
 10–49 employees               15.3            16.1               16.0            17.0              16.2
 MSEs total                    31.6            35.9               32.7           32.3               32.5
 50–249 employees              19.2            19.7               1.7            1.7              1.3
 SMEs total                    50.8            55.6               51.4            51.0              50.8
 250+ employees                49.2            44.4               4.6           49.0               49.2
 total                        100.0           100.0              100.0          100.0              100.0
* Sole proprietors’ data in 2001 apply to 0 employees.
** Sole proprietors’ data in 2001 apply to 1-9 employees.
 Source: Calculated on the basis of tax return data



The share of micro and small enterprises, medium-sized and big companies hardly
changed between 2001 and 2005. Micro and small enterprises produce one third,


                                                         21
2.                                           SITUATION ANALYSIS




     medium-sized ones produce a fifth and big companies produce nearly half of the total
     added value.

     There is hardly any change in the proportion of sales revenues of enterprises of various
     size categories. The share of micro and small enterprises shows a modestly growing
     tendency, that of big companies shows a slightly declining one. In 2005 37 per cent of
     total net sales revenues was realised by big companies, 1 per cent by medium-sized
     enterprises and 45 per cent of micro and small enterprises (including sole proprietorships
     and enterprises under Simplified Entrepreneurial Taxation (EVA) scheme. Sales revenues
     shrank at 45 of enterprises keeping double-entry books and increased at 55 per cent of
     them between 2003 and 2005. Exactly a quarter of enterprises had an average annual
     growth rate of sales revenues exceeding 25 per cent.

      Distribution of net sales revenues of enterprises according to company headcount categories (2001–2005) (%)
                                  2001             2002            2003***           2004***          2005***
      0-1 employee*                6.7               .2              6.               6.0               9.0
      2-9 employees**             14.              15.3             14.3              13.6             14.9
      10-49 employees             19.0              20.4             21.2              22.3             20.9
      MSEs total                  40.5              43.9             42.3              41.9             44.8
      50-249 employees            1.5              19.3             1.6              19.0              17.7
      SMEs total                  59.0              63.2             60.9              60.9             62.5
      250+ employees              41.0              36.             39.1              39.1             37.5
      total                      100.0             100.0            100.0             100.0            100.0
     * Sole proprietors’ data in 2001 apply to 0 employees.
     ** Sole proprietors’ data in 2001 apply to 1–9 employees.
     ***Enterprises under the EVA scheme included.
      Source: Calculated on the basis of tax return data



     In terms of distribution of export sales it has been typical since 2002 that the share of big
     companies remains unchanged (64-65 per cent), that of medium-sized ones has been
     slightly declining and that of micro and small enterprises is somewhat on the increase.
     In 2005 micro and small enterprises conducted 22 per cent of total export, medium-sized
     companies 13 per cent. At real value, exports of small enterprises employing less than
     49 people grew from HUF 1500 billion to HUF 2140 billion between 2001 and 2005, which
     is a very significant rise.




                                                           22
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                 2.
 Distribution of export sales in enterprises with double-entry bookkeeping, per headcount category
 (2001–2005) (%)
                             2001              2002              2003                 2004             2005
 0–1 employee                  2.6               3.7                  2.1               5.5              5.9
 2–9 employees                 5.2              5.                   5.2               4.9              5.5
 10–49 employees               .9             10.5                 14.6               11.             10.3
 MSEs total                  16.7              20.0                 21.9               22.1             21.7
 50–249 employees             13.1             15.1                 13.7               13.9             13.5
 SMEs total                  29.8              35.1                 35.6               36.0             35.3
 250+ employees               70.1             64.                 64.4               64.0             64.7
 total                      100.0             100.0              100.0                100.0            100.0
 Source: Calculated on the basis of tax return data



At real value, in 2001–2005, exports of enterprises increased in all headcount categories.

An increasing number of Hungarian companies have reached a size which allows them to
step out of the domestic market, not only exporting goods but also capital. According to
figures of the Hungarian Central Bank, the amount of Hungarian working capital flowing out
was an outstanding EUR 1.4 billion in 2003, followed by 0. billion in 2004 and exceeding
EUR 2 billion and 2.1 billion in 2005 and 2006, respectively. However, only a small, though
growing share of this amount comes from small and medium-sized companies. On a
longer term, profitability of these enterprises may improve.

The aggregate number of loss-making individual and corporate companies shows a
declining trend. Their rate appears to have stabilised over the past four years, that
is, between 2002 and 2005, both in the case of individual and corporate companies.
Somewhat more than a third of enterprises posted a loss in 2002–2004.

 the number and rate of loss-making enterprises (2001–2005) (pieces, %)
                                              2001           2002            2003             2004       2005
                              Number         95,399          99,03          3,173           90,11    4,726
 Corporate companies
                               Rate            36.6            37.7            36.            36.3       33.
                              Number        144,222         133,206         124,302       121,20      112,025
 individual companies
                               Rate             47.7           33.5            35.1            35.4       32.6
 Source: Calculated on the basis of tax return data

The corporate tax burden of enterprises is in inverse proportion to their size, meaning
that it decreases as we proceed from small enterprises towards big ones. The reason for
this is that big companies claim more tax allowance.




                                                       23
2.                                             SITUATION ANALYSIS




     As it can be seen, the performance of smaller enterprises differs significantly from that
     of bigger ones in many areas. This difference in performance may be due to the following
     major reasons:
     • Problems related to economies of scale (in certain sectors);
     • Weak innovation capacities;
     • Difficulties in access to financial resources;
     • Quality of technological and ICT equipment;
     • Insufficient managerial, market, trade, marketing, HR, financial and IT knowledge,
        skills, and limited readiness to cooperate.


     2.2.4. enterprises in a regional view

     40% of the enterprises are located in the Central Hungarian Region, above all in Budapest.
     The role of the central region is outstanding when it comes to the number and distribution
     of operating enterprises, as well as their income production and performance, similarly
     to other economic and social figures. Examining rural regions without the central region
     it may be observed that the income production of small enterprises is much less widely
     spread than that of big companies. The difference of the added value figure per capita,
     for example, is nearly four-fold in the case of big companies in the most developed
     and the least developed rural regions, while hardly more than 1.5-fold in the case of
     medium-sized enterprises. This means that in the development and retention of regional
     economic inequalities it is rather big companies that play a role, the income generation
     of small and medium-sized enterprises is much more evenly spread.

     Not only the absolute number but also the density of enterprises is the highest in the
     Central Region. It may be observed that enterprise density and the state of economic
     development show parallel trends. In Transdanubian regions enterprise density is higher,
     while in regions of the Great Plain it is lower.

      Some figures of enterprises in 2005, according to statistical regions (pieces, %)
                                          enterprise
                                                                         rate of    rate of    rate of
                                           density            rate of                                    rate of
                                            (Number of                 subscribed   added       sales
                                                             employees                                   export
                                          enterprises per                capital     value    revenues
                                         1000 inhabitants)

      Central Hungary                          96               45.3      59.3       56.2       55.1        39.0
      Central Transdanubia                      67              10.       9.3         9.7      11.        23.5
      Western Transdanubia                     71                9.5       7.6         9.5       9.2        19.0
      Southern Transdanubia                    63                6.9       5.7         4.       4.1         1.7
      Northern Hungary                         50                7.7       6.3         6.9       6.0         6.7
      Northern Great Plain                     54               10.1       6.2         6.       7.3         5.9
      Southern Great Plain                      61               9.       5.6         6.0       6.6         4.1
      average/total                            70              100.0     100.0      100.0      100.0     100.0
      Source: Demography of Enterprises 2004 (HCSO 2006) and calculations on the basis of tax return data




                                                                24
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                               2.
25–42 per cent of the added value is created by micro and small enterprises, 17–29 per
cent by medium-sized ones and 30–55 per cent by big companies. This means that the
performance of big companies is the most widely spread of all. The contribution of micro
and small enterprises to added value production exceeds the average in the Southern Great
Plain, the Northern Great Plain, the Southern Transdanubia and the Western Transdanubia
regions.

 Dispersion of added value in 2005. according to employee headcount and regions (%)
                             0–49 employees      50–249 employees   250+ employees    total
 Central Hungary                   31.2                16.6              52.2         100.0
 Central Transdanubia              25.5                19.2              55.2         100.0
 Western Transdanubia              34.4                17.0              4.6         100.0
 Southern Transdanubia             36.0                1.9              45.2         100.0
 Northern Hungary                  26.3                21.6              52.1         100.0
 Northern Great Plain              36.3                23.4              40.4         100.0
 Southern Great Plain              41.9                2.5              29.7         100.0
 average                           31.8                18.5              49.7         100.0
 Source: Calculated on the basis of tax return data



Productivity averages of enterprises are relatively close to each other. One employee
creates an average of HUF 22 million in sales revenues at micro and small enterprises,
21 million at medium-sized ones and 30 million at big ones. Differences are thus not very
big. Regionally this figure is significantly higher in Central Hungary, Central Transdanubia
and Western Transdanubia than in other regions. The difference is about 1.5-2-fold.

Remarkable differences may be observed regarding employee headcount. Within
enterprises of various size categories, differences are big, but do not strictly follow
regional differences. In the Central Hungarian region the productivity of micro and small
enterprises as well as medium-sized enterprises is higher than that of big companies.
This is not the case in any other region. In the other regions big companies have higher
productivities. The productivity gap between big companies on the one hand and micro
to small enterprises on the other is the widest in the Central Transdanubian and Western
Transdanubian regions (their ratio is 2-3-fold), while in the rest of the regions it is much
more balanced.




                                                      25
2.                                           SITUATION ANALYSIS




      Sales revenues per employee in 2005, according to employee headcount category and regions in 2005
      (thousand huf)
                                           0–49 employees       50–249 employees   250+ employees   total
      Central Hungary                           30,42               31,16            2,022       29,772
      Central Transdanubia                      15,794               1,469            42,131       26,6
      Western Transdanubia                      1,729               14,247            37,325       23,599
      Southern Transdanubia                     13,95               11,354            19,356       14,550
      Northern Hungary                          14,54               15,07            2,417       1,927
      Northern Great Plain                      15,61               14,635            24,70       17,757
      Southern Great Plain                      16,325               15,065            1,72       16,502
      average                                   22,341               21,302            29,500       24,460
      Source: Calculated on the basis of tax return data




     2.2.5. trends in Some factors of Competitiveness

     Competitiveness of small enterprises is basically determined by the way in and the
     extent to which they are able to react to the challenge posed by the high degree of
     efficiency at big companies. In this respect it is typical of the Hungarian economy that
     small and medium-sized enterprises have, on various areas, developed instruments
     which make them competitive in comparison to big companies, and they are
     increasingly able to exploit such methods. Among these methods, let us highlight
     the following ones:


     2.2.5.1. Division of Labour

     Small enterprises are unable to operate efficiently those management functions which
     are indispensable for running the business. Accounting, marketing, legal, technical, IT
     and other services are increasingly purchased by Hungarian small and medium-sized
     enterprises from external suppliers, which is pointed out in representative entrepreneurial
     surveys regularly conducted by the MoET. Nearly three-thirds of Hungarian small
     and medium-sized enterprises regularly purchase some kind of operational or partly
     strategic service. An external accountant is hired by two-thirds of enterprises. Half of
     the enterprises purchase at least two kinds of services on a regular basis. This trend
     in labour division contributes substantially to small enterprises’ ability to retain or in
     some cases improve their competitiveness as opposed to big companies and foreign
     competitors. Markets of operational and, to a lesser extent, strategic services have
     evolved and are changing together with market demand. On these markets the majority
     of service providers are also small enterprises.


     2.2.5.2. Networking

     For small to medium-sized enterprises networking is one of the most efficient instruments
     to reduce or mitigate disadvantages of economies of scale. The networking of Hungarian


                                                           26
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                 2.
small and medium-sized enterprises shows a tendency that is adequate to the general
state of economic development in the country and is growing. The organic nature of
the networking process is shown by the fact that Hungarian small and medium-sized
enterprises often have simpler, informal relationships, and it is on the basis of these ties
that formal cooperation emerges.

 rate of enterprises participating in cooperation (%)
                       enterprise without                      Small      medium-sized
                                                micro                                    total
                          employees                          enterprise    enterprise
 Informal or formal            46.0              54.4           64.4          6.        49.
 Neither informal
                               54.0              45.6           35.6          31.3        50.2
 nor formal
 total                        100.0             100.0          100.0         100.0       100.0
 Source: representative MoET entrepreneurial survey, 2007.



The instruments small enterprises use in order to step up their efficiency range from
the simplest to the most refined ones. There are various examples to demonstrate that
networks stand the competition with big companies. Retail and wholesale networks
work especially well. The capacity for networking is available in the Hungarian economy,
being an important instrument of adjustment to the market economy.

On the basis of tax return data, ownership networking has made an advance in the
Hungarian economy: both the number and the value of investments into other businesses,
as well as the rate of these investments compared to the total subscribed capital grew
in 2005, which is a sign of corporate concentration. This also means that enterprises
belonging to a network have, on average, more resources at their disposal than their
fellows who are not in networks, and their performance is also higher.


2.2.6. groups of Small enterprises

On the basis of our analyses and surveys, small enterprises – which make up 99.2% of
all businesses, being the most heterogeneous group – can be classified clearly into three
groups:

The group of fast-growing enterprises consists of approximately 15 per cent of the
businesses. They are either in the expansive or in the mature phase of their life
cycles. They consider their situation good and have an optimistic view of the future.
They are typically micro and small enterprises of legal entity, members of groups of
companies or entrepreneurial networks. They mostly sell their products and services
to other businesses; they are in the process of expanding their staff and are planning
investments. Their sales revenues, sales opportunities and exploitation of capacities are
improving, their profitability is on the rise. The personal income of these entrepreneurs
is increasing. This group includes businesses showing fast growth, exceeding 20 per
cent in 2004–2005, and innovative small enterprises active on external markets or


                                                        27
2.                                    SITUATION ANALYSIS




     expanding, or moving considerable intellectual capital. In terms of financing they rely
     on bank funds too.

     They consume and demand up-to-date, specialised sectoral-professional, technological,
     business, financial and legal information from both Hungary and abroad. They are partners
     of advisory companies operating according to market principle, and of entrepreneurial
     organisations, in fact, active members in the latter ones. They are participants in various
     business strengthening and public procurement tenders, and targets for capital market
     financing by financial institutions.

     The group keeping up current levels includes 65–70 per cent of enterprises. Their life
     cycles are varied on a broad range, from start-up to maturity. They consider their situation
     average and do not expect changes, neither improvements nor decline. More than two
     thirds are sole proprietors and micro enterprises with single-entry bookkeeping, that
     is, limited partnerships and general partnerships. Their networking level is lower than
     that of the first group. They mainly produce for the retail market, but the proportion of
     those selling to other businesses is also significant. They are expanding their staff and
     some of them are making investments. Their sales revenues, sales opportunities and
     exploitation of capacities are improving, their profitability is on the increase, though
     to a lesser extent than in the first group. Personal income of the entrepreneurs shows
     a modest growth. Only in exceptional cases do they resort to bank funds for financing,
     they rather rely on support from family or friends.

     In addition to general business education they are in a need of sectoral-professional,
     business, financial and legal counselling. They are potential participants of business
     strengthening tenders. They are also the target group for micro credit, of financial
     institutions operating with mutual guarantee, and of loan associations. Potential
     customers of banks are among them.

     The group of laggards includes up to 16–20 per cent of enterprises. They are either in the
     start-up or in the declining phase of their life cycles. They consider their situation bad
     and have a bleak vision of the future. They primarily sell their products and services to
     the population. Typically, these enterprises are out of entrepreneurial networks. Their
     state seems to be critical. Their sales revenues and exploitation of capacities are on
     the decline, with deteriorating sales opportunities and profitability. (On the basis of tax
     returns we have identified 0,000 shrinking associated enterprises with sales revenues
     falling between 2003 and 2005.) Personal income of the entrepreneurs is declining.
     When they need external financial resources, they rely on help from relatives or friends.
     This group also includes some not very successful entrepreneurs at social, ethnic or age-
     related disadvantages.

     They would need regular counselling by an advisory, supportive institution with a thorough
     knowledge of their circumstances and situation. They are potential targets for education
     in general business studies, and micro credit.


                                                  2
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                              2.
It is visible, therefore, that the state of small enterprises is varied, with big differences
between their groups. Numerical proportions of these groups, however, have been largely
stable since the late nineties.


2.2.7. factors impeding operations of enterprises

In a questionnaire-based survey of the Ministry of Economy and Transport, Hungarian
small and medium-sized enterprises gave grades on a scale of 5 to factors having an
impact on their growth. Factors “not impeding growth of the enterprises in any way”
received a one, while “significantly” impeding factors were given a five. A figure of
importance was calculated in a way that answers were transformed to a scale ranging
from 0 to 4, having 5 grades. Each figure was multiplied by the number of respondents
and divided by the maximum possible value of the figure. This way a percentage value
was received the maximum of which is 100 if everybody gives the highest importance to a
given factor, and the minimum of which is 0 if everybody gives the lowest importance to it.
The following table shows the changes of these figures of importance over time:

 figures of importance of factors impeding growth of enterprises (hundred-point scale)
                                                                         figure of importance
 factors impeding growth
                                                          1997    1998      1999     2003       2005   2007
 High tax and social security burdens                      4       7       73       74        72     77
 Unpredictability of economic regulation                   62       5       53       5         55    63
 Strong competition                                        53       57       61       61         61    56
 Not enough orders received                                4       45       52       45        4     45
 Unfair competition                                        46       44       44       47        4     45
 Clients defaulting on payments                            30       31       30       32        34     35
 Shortage of capital                                       40       37       37       34         32     31
 Other impeding factors                                    19       20       17       16        13     19
 Difficulties in purchasing                                14       16       16       17        16     13
 Outdated, not modern existing capacities                  17       19       17       17        13     12
 Lack of credit                                            27       26       26       20        15     12
 Shortage of labour                                         9        9        9       12               9
 Put into order on the basis of 2007 data, Source: representative MoET entrepreneurial survey, 2007

These data result in the following picture concerning trends in factors impeding operations
of enterprises.

As the single most impeding factor, entrepreneurs continue to identify the high tax and
social security burdens, but the value of this factor shows a sharply declining tendency. In
1997 it was 4%, it decreased to 73% in 1999, continued to decline in 2005 (72%), though it
rose significantly in 2007 (77%). Another score which increased considerably was that of
unpredictability of economic regulations. This factor fell behind that of the fierce competition
in 199-2005, but again overtook it in 2007. Factors characterising the market environment
(fierce competition, not enough orders, unfair competition) occupy positions 3 to 5.


                                                     29
2.                                          SITUATION ANALYSIS




     For an easier overview we classified 12 factors into 4 groups of factors.

      ranking of the four groups of factors drawn up by entrepreneurs (hundred-point scale)
                                                                  average value
      group of factors*
                                    1997         1998           1999         2003          2005          2007
      Regulation                     72            67            63            63           64            70
      Market environment             49            50            53            51           53            49
      Financing                      30            29            30            26            27           26
      Inputs                         12            11            13           13            12            11
     *Regulation includes tax and social security burdens, and the unpredictability of economic regulation.
      Market environment: fierce, unfair competition, not enough orders.
      Financing: shortage of capital, lack of credit, default payments.
      Inputs: outdated capacities, difficulties in purchasing, labour shortage.
      Other impeding factors and corruption were not considered.
      Source: representative MoET entrepreneurial survey, 2007


     The main group of factors impeding enterprises is the regulatory environment, followed
     by the market environment in the second place. Financing and access to input (the third
     and fourth groups of factors) cause less trouble to enterprises. Legal compliance and
     administrative burdens pose special difficulties for smaller enterprises with rather
     limited administrative capacities.

     For this reason, two important trends are captured by the table. Firstly, the fact that the
     downward trend regarding the regulatory environment started to rise again in 2005.
     Secondly, it is remarkable that since 1999 financing issues have caused increasingly less
     trouble to enterprises. This presumably reflects the fact that from late 1999 commercial
     banks and savings cooperatives started serving small and medium-sized enterprises
     with new loan products and services at a swiftly increasing pace. Also, a sizeable group
     of enterprises plans not to draw on any external resources and therefore appears in the
     survey as a group having no trouble with financing.

     Changes in the intensity of factors impeding enterprises reflect changes in economic
     policies and in economic conditions. Between 1992 and 2001 the redistribution rate
     continually declined in Hungary, apart from one minor setback, and income centralisation
     shows a similar tendency. As it can be seen, evaluations given by entrepreneurs reflected
     this trend regarding the period from 1997 to 1999 in a way that they rated high taxes
     and contributions as factors impeding growth to be of declining intensity. A palpable
     decrease, though not as sharp as the above, was indicated in the intensity of unpredictable
     economic regulations. In the meantime, the intensity of fierce competition was still on the
     increase, which reflects that enterprises felt more and more constraints and motivation
     arising from market competition, while the disturbing effect of governmental policies
     declined, even if at a slow pace. 2003 figures clearly indicate a halt and a partial setback
     in the process which gained considerable momentum by 2007. Compared to late 1999
     the evaluation of the group of regulatory factors worsened, and also the former growth
     in the intensity of evaluation given to market factors came to a halt.


                                                           30
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                         2.
2.3. Analysis According to Pillars

After a general analysis of the state of enterprises, for the purpose of further analysis
we identified four areas fundamental for the development of small and medium-sized
enterprises. These four pillars are



   1. Regulatory environment,
   2. Financing,
   3. Knowledge (entrepreneurial skills, human resources) and
   4. Development of entrepreneurial infrastructure.



Some of the factors introduced in the course of the situation analysis have considerable
impact on several fields, but in the situation analysis below we only introduce each of
these on one field, for reasons of limitations to the size of the present work. Thus for
example public burdens are of special importance in the areas of regulation and financing
too, or the provision of integrated services appears both in the field of infrastructural and
human resource development. At the end of each section, the most important problems
for each intervention area at a given time are displayed, forming a part of the cause and
effect analysis which was conducted in detail, though for limitations to the size of the
work it is presented in the Appendix. At the end of each chapter summaries are provided
with the help of so-called problem trees.


2.3.1. Structure of the Situation analysis regarding the Sme-sector




        1. Regulatory
                               2. Financing             3. Knowledge                4. Infrastructure
        Environment




                                                        Knowledge of
        Public burden-       Financial market
                                                      entrepreneurs and             ICT infrastructure
           sharing               products
                                                          employees




        Administrative                                 Entrepreneurial              Business and R&D
                             Savings of SMEs
          burdens                                           skills                    infrastructure




      Legal and business                                                  Pillars
                             Liquidity of SMEs
            safety
                                                                          Cornerstones




                                                 31
2.                                                 SITUATION ANALYSIS




     2.3.2. regulatory environment

     Economic operators, particularly smaller businesses, found it difficult already in the past
     to find their ways among conditions of the economic environment. With the EU-accession
     these challenges intensified further, parallel to a widening in the scope of opportunities.
     As in all Member States of the European Union, Community law enjoys primacy over
     national legal systems, in order to ensure the achievement of Community objectives.
     As of 1 May 2004, the whole of the EU Acquis must be applied to all operators of the
     Hungarian economy. At this time, an Acquis of approximately 130,000 journal pages was
     effective across the European Union, comprising 1,00 directives, 6,000 regulations and
     about 10,000 secondary legislations. In connection with the EU-accession the number
     of effective legislations increased further in Hungary. Keeping up with legislation was
     made much more difficult by the fact that there were frequent amendments over the
     recent period to provisions of law, in the frames of legislative packages and budget acts.
     The currently valid Hungarian legal system is therefore characterised by overregulation,
     a lack of internal and external coherence, of transparency and of clarity, considerable
     parallel structures and a lack of balance of legal source levels.

     Within the confines of the present situation analysis, changes in the legislative environ-
     ment and their impact on SMEs cannot be described, as there is hardly any legal field
     where changes do not affect operations of enterprises, depending on their activities
     or size.

     In order to have regulators in place that conform to social-economic requirements,
     ensure competitiveness and quality public services, are flexible, cost-efficient, simple
     and transparent, there is considerable demand for cuts in administrative burdens on the
     one hand, and for an overhaul of the regulatory system as well as mandatorily in-built
     and continually upheld quality elements on the other

     As it was described in detail in Chapter 2.2.5, representative MoET entrepreneurial
     surveys, which have been drawn up for 10 years, go to show that among factors impeding
     the growth of enterprises, Hungarian small and medium-sized entrepreneurs consider
     performance of high public burdens and the unpredictability of the economic regulations,
     that is, the regulatory environment, to be the factor most heavily impeding their growth.
     The intensity of the factors rose significantly in 2007.

     Direct burdens (costs) of the Hungarian entrepreneurial sector, comprising data provision
     to the public administration and other, public administration procedure-related burdens
     (costs), may amount to 4.5–6.7 per cent of the GDP.5 In absolute terms, comparing to the
     2005 GDP, this equals HUF 1,000–1,500 billion. A small share of Hungarian administrative

     5 The size of the estimation domain is a consequence of the calculation method applied: in the case of the Netherlands and
       Denmark the scale of public administration burdens was assessed in detail. The total Hungarian burden was calculated by way
       of proportioning, on the basis of the World Bank’s “Doing Business, 2006” figures reflecting time- and cost-intensiveness of
       each procedure.




                                                                    32
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                            2.
duties (about 1.5%) stems from EU obligations, while the larger part is generated by
the Hungarian regulatory and public administration environment. In our estimations the
scale of data provision burdens imposed under national competence falls between HUF
770 billion and 1145 billion.

In the EU-25 administrative burdens of entrepreneurs make up on average 3.5% of the
GDP, states the Commission in its communication.6 Analyses assessing burdens related
to each type of data provision have been drawn up with respect to few countries up
to now. Such surveys were conducted in the Netherlands and Denmark. Costs of data
provision towards the public administration, incurred by entrepreneurs, amounted to 3.4
per cent of the GDP in the case of the Netherlands. In Denmark the same figure is 1.7 per
cent. This is to say that in Hungary data provision costs burdening the entrepreneurial
sector significantly exceed the EU-25 average, irrespectively of whether we consider the
lower or the upper limits.

In the World Bank’s 2006 ranking (Doing Business 2007) Hungary ranks 66th of 175
countries from the point of view of business environment. The gap is especially wide
when it comes to the bureaucratic nature of licensing procedures (number of procedures,
time- and cost-intensiveness), where Hungary ranks 143rd. Nevertheless, the situation
is not much better (ranking 11) when it comes to investor protection (transparency of
business transactions, enforceability of shareholders’ rights, accountability of senior
managers) and burdens arising from tax procedures (frequency of and time demanded
by tax payments).

The quality of compliance with rules is significantly influenced by eGovernment services.
This field saw important updates in the past two years, which improved Hungarian figures
in international comparison:7 the range of electronically available services expanded,
the number of users increased and the electronic accessibility of institutions in the
public sphere improved. The 50% rate of basic public services completely accessible
electronically for the general public exceed the 36% average of the EU-25, but in the case
of companies this figure falls significantly behind the European average, with Hungary
ranking 21st.

It poses significant business risk to Hungarian small and medium-sized enterprises that
the enforcement of their rights and claims is slow in Hungary, and the jurisdiction does
not guarantee predictable operations of companies.

On the basis of analyses we would present the regulatory barriers to SMEs’ operations
in the following structure:

6 COM(2006) 691
7 The latest survey of the UN, preparing an annual eGovernment Readiness index, found that Hungary skipped from position
  33 to 27, ranked 18th among European countries, and among new Member States only Estonia and Slovenia overtook
  Hungary, with more developed systems. See: Department of Economic and Social Affairs Division for Public Administration
  and Development Management: UN Global E-government Readiness Report 2005 From E-government to E-inclusion. United
  Nations New York, 2005




                                                             33
2.                                      SITUATION ANALYSIS




                                                problem tree



      1. High operational
       and transactional
                               Difficulties of having          Human resource          Infrastructural
     costs of enterprises
                                access to finances              weaknesses              deficiencies
         and barriers of
     economic regulation




        Time- and cost-
                                Regulatory environ-                                     Business and
       intensiveness of                                         Problems with
                                 ment causing high                                   legal safety, unfair
     market entry could be                                       market exit
                                 operational costs                                      competition
        reduced further



                                High public burden             Time- and cost-
            Still high                                                                Unpredictability
      incorporation costs                                         intensive
                                                                                       of regulations,
        for enterprises                                                               underdeveloped
                                    Low tax and                                       system of impact
                               contribution base due            Few options for            studies
                                to widespread black            settling financial
      Difficult reporting
                                 and grey economy                  problems
          obligations

                                                                                         Inadequate
       Difficult licensing                                   Weaknesses of lender   information provided
                                  Administrative
          procedures                                             protection          to economic actors
                               obligations resulting
                                   in high costs

                                                             „Chain debt” spread      Law enforcement
                                                                   widely               deficiencies
                                  Deficiencies in
                                regulatory environ-
                               ment of the electronic
                                                                                       Infringements of
                                     economy                  Lack and high cost      the law related to
                                                               of convertibility    intellectual property
                                                              of the labour force


                                                                                      Alternative forms
                                                                                     of settling debates
                                                                                     are not sufficiently
                                                                                         widespread



                                                                                    Deficiencies in market
                                                                                         supervision

            Pillars

            Cornerstones                                                                 Corruption

            Specific factors




                                                        34
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                             2.

2.3.3. financing

Enterprises’ own resources for accumulation are generated from amortisation and after-
tax-results. The vast majority of resources is generated at a relatively low number of big
companies, which means that their distribution is concentrated. One reason for this is
that significantly more amortisation occurs at big companies. The other reason lies in tax
allowances of big companies. In 2005 more than half of all resources for accumulation
were generated at big companies, 13 per cent at medium-sized and 34 at micro and
small enterprises. The share of small and medium-sized enterprises shows a declining
tendency, while that of big companies is on the increase.

Typically, the rate of resources for accumulation compared to the gross added value
decreases as we proceed from the smallest enterprises towards bigger ones, to the
point of medium-sized enterprises, then it rises again when reaching big companies.
Resources in excess of the national average were only built at micro enterprises in each
of the five years between 2001 and 2005.

Financing of enterprises takes place mainly on the basis of companies’ capital, credits and
income. The total equity of enterprises was HUF 16,51 billion in 2005, and the average
equity amounted to HUF 66 million. However, averages are misleading, as more than
three quarters of enterprises do not reach the average level. 25 per cent of enterprises
had equity of less than HUF 62,000  half of them had less than 2.9 million and three
quarters had less than 9.5 million in equity. 49 per cent of capital was concentrated at big
companies, 16 per cent at medium-sized and 35 per cent at micro or small enterprises.
This is connected to the fact that the average equity of enterprises with less than 50 staff
is rather low.

 Distribution figures of equity of enterprises with double-entry books in 2005 (thousand huf, %)
                                 lower quartile   median      upper quartile     average      Distribution
 0–1 employee*                         –127          1,33          3,795          12,345            .9
 2–9 employees**                        219          3,557         10,14           19,042          11.9
 10–49 employees                      7,516         29,74         5,934         103,217           14.6
 MSEs total                              45          2,807          8,680           23,791          35.4
 50–249 employees                    62,07        223,021        54,101         605,323           15.
 SMEs total                              59          2,882          9,373           33,797          51.2
 250+ employees                    369,93        1,537,734     4,370,393       10,743,024          4.
 total                                   62          2,894          9,518          65,868          100.0
 Source: Calculated on the basis of tax return data



In addition to own and emerging so-called spontaneous resources (suppliers’ receivables,
wages, public liabilities), credit and loans are also important elements in the financing

8 Equity may also be negative.




                                                         35
2.                                                  SITUATION ANALYSIS




     of enterprises. Data calculated from tax returns do not make a distinction between bank
     credit and loans provided by others than financial institutes. The difference between
     the data of the Hungarian Financial Supervisory Authority and the Tax Authority is
     significant, approximately HUF 750 billion. This is the amount of credit received by
     enterprises directly from abroad, or provided by enterprises to each other, or by owners
     to their own enterprises under the title member’s loan. We are probably not mistaken if
     we presume that the majority of these inter-company loan transactions was performed
     between related enterprises.

     A significant share of the enterprises operates without credit and/or loans (hereinafter, for
     simplicity’s sake: credit). Still, even short-term credits are only held by 25.6 per cent of
     enterprises, which means that 74 per cent of enterprises with double-entry books operate
     without credit. The rate of credits is lower at small enterprises than at medium-sized and
     big enterprises. This is true for short-term credits, at least. As regards long-term credits,
     medium-sized enterprises have a higher share of these than big companies. It is typical
     of the distribution of credit that 99 per cent of enterprises possesses up to 75–0 per cent
     of the total credit, while 1 per cent possesses 20–25 per cent of the total credit.

     Problems of financing small and medium-sized enterprises are similar in developed
     European countries and in Hungary. At the same time, in developed countries enterprises
     have significantly better access to external financing, through the financial intermediary
     system. Therefore, while 20–25 per cent of the Hungarian enterprises are eligible for
     banks, this rate is 70–85 per cent in developed countries.

     After a marked drop followed by stagnation in the mid-nineties, the external financing of
     SMEs showed spectacular growth as of 2000. 9 From 1999 to 2006 the bank credit stock of
     small and medium-sized enterprises grew from HUF 460 billion to more than HUF 3,200
     billion, which is a nearly seven-fold increase. Late 2006 SME credits accounted for more
     than half (54%) of the total corporate credit stock. Market credits from commercial banks
     played the lead role in this process. Credits provided by credit cooperatives to micro,
     small and medium-sized enterprises are of less importance than commercial banks, the
     credit stock of these amounted to HUF 256 billion at the end of 2006. In the high proportion
     of SME-credits, however, a key fact is that big companies contract a significant part of
     their credits from abroad, either from or through their parent companies.

     The credit stock of the SME-sector increased in all size categories at a pace and to an
     extent exceeding that of big companies.




     9 Detailed data on the bank financing of micro-, small and medium-sized enterprises have been available on the basis of
       communications by the Hungarian Financial Supervisory Authority (HFSA) since end-1999. The system was instituted by the
       SME Act XCV of 1999, ruling that data must be provided on the share of small businesses in subsidies, credits for entrepreneurs
       and public procurements, respectively, by 30 June each year. The current scope and order of data provision is governed by
       Decree 307/2004 (XI. 13.) on the basis of the new SME-act (Act XXXIV of 2004). Previously, the Central Bank was the only source
       of data on the development of the credits/deposit stock of entrepreneurs, but they used a different methodology.




                                                                    36
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                            2.
 trends in the bank credit stock of the Sme sector at current prices, between 1999 and 2006 (billion huf)
 Bank credit stock of       1999        2000           2001          2002           2003       2004     2005***    2006
 enterprises*              31 Dec      31 Dec         31 Dec        31 Dec         31 Dec     31 Dec    31 Dec    31 Dec
 Micro enterprises          112.7          210.7          416.       525.         60.9       747.3     97.7    95.6
 Small enterprises          110.6          264.9          300.5       266.9         370.3      456.5      929.7    970.2
 Medium-sized
                            237.7          42.5          563.3       609.6         734.4     1,021.6     970.2   1,294.7
 enterprises
 Smes total                 461.0          904.1     1,280.7        1,402.4        1,785.6   2,225.5    2,797.6   3,160.4
 Large companies
                          1,934.0      2,171.4        1,953.1       1,1.       2,244.9     2,37.5   2,43.6   2,60.2
 (estimation)
 Non-financial
                          2,395.0      3,075.5       3,233.        3,24.2       4,030.5     4,613.0   5,236.2   5,40.6
 enterprises* total
 Sole proprietorships     No data     No data              42.4           43.5       55.2       66.4       70.5      74.6
 enterprises total        2,395.0      3,075.5       3,276.2        3,327.7        4,086.1    4,679.4   5,306.7   5,915.3
* except for data of MFB, EXIM and KELER plc.
** Note: In 2000 and before that, non-financial enterprises still comprised small entrepreneurs.
*** Note: Due to methodological changes (SME definition), 2005 and 2006 figures allow for a limited
    comparison with earlier figures.
 Source: Central Bank of Hungary, HFSA, 2007.


One of the essential macro-level indicators of financing is the depth of financial
intermediation. Compared to the EU-15 average (44.7%) the credit/GDP rate of total credit
provided to non-financial companies (including big companies) is significantly lower in
Hungary (approximately 25% in 2005). This rate shows no considerable increase from
23% in 2000. With a slight fluctuation in the total corporate credit stock, the rate of the
SME credit stock to the GDP is increasing dynamically, having tripled from 1999 to 2005
(from 4.1% to 12.%). Considering that the GDP, too, underwent marked growth over the
same period, we can speak of a clear catching-up tendency in SME financing.

 percentage rate of corporate credit from domestic banks to the gDp, 1999–2005
                                 1999              2000           2001           2002        2003       2004      2005
 Total corporate credit          21.02          23.35             21.7          19.62       21.61      22.69     24.07
 From which
                                    4.05           6.6            .62           .01       9.2       10.94     12.4
 Credit to SMEs
 Source: HFSA, Central Bank of Hungary


The marked expansion of the SME credit stock can be attributed to two major reasons.
Firstly, commercial banks upgraded their services significantly, and this made among
others credit evaluation and risk management much cheaper. Secondly, the number and
borrowing capacity of credit-worthy enterprises increased.

The majority of banks were reluctant for quite a long time to supply credit to SMEs,
because in the early nineties a lot of bad debts were generated by this clientele. This
situation improved significantly over the recent years, with increasing competition
between banks also at play. The sector of small and medium-sized enterprises is also
attractive for banks because this sector may not be threatened so much by cross-border


                                                              37
2.                                           SITUATION ANALYSIS




     competition on the banking market, since small enterprises have a need for local banking
     relationships.

     Also in the bank financing of the SME sector, credit denominated in foreign currency is
     of increasing weight. This trend towards FOREX, increasingly appearing as irreversible,
     steps up credit risk, just like the considerable deterioration of paying morals does,
     experienced currently. As a result, the portfolio quality of credits deteriorated. This
     may not yet be considered a large-scale deterioration, with its rate staying within the
     confines of international norms, still it pushes banks to tighten their risk management
     practices. An analysis according to banks shows that provision of credit to the SME
     sector is concentrated. 5 per cent of the corporate credit market, along with 94 per
     cent of business-purpose real estate credit, was represented by seven large banks in
     2006. Willingness of banks to provide credit has been surveyed by the Central Bank of
     Hungary since 2003, every six months. According to these surveys banks continue to
     open towards the sector of small and medium-sized enterprises, with their willingness
     to provide credit showing the fastest growth in this direction.

     According to international experience credit guarantee is one of the most appropriate
     tools of promoting SME crediting. In Hungary, guarantee undertakings of Credit
     Guarantee Ltd and the Rural Credit Guarantee Foundation cover somewhat less than
     10 per cent of SME credit. This coverage is not growing. Examining the issue according
     to headcount categories, there is negative correlation between the credit stock and the
     changes in coverage; the credit stock showed the fastest growth at micro enterprises,
     while coverage decreased.

      the role of state guarantee: stock of credit guaranteed by Credit guarantee ltd. and rural Credit
      guarantee foundation, displayed in percentages of the total credit stock
                                                      2000        2001     2002      2003       2004      2005
      Small and medium-sized enterprises in total     11.6        10.9     12.2       11.6      13.6      8.6
      Micro                                           17.5        .6       7.2       9.4       15.5      11.
      Small                                           13.0        17.0     19.0       17.2      19.3       7.9
      Medium-sized                                     7.        15.1     13.3       10.9       9.7       6.1
      Source: Credit Guarantee Ltd., Rural Credit Guarantee Foundation, on the basis of HFSA data


     The Hungarian factoring turnover has been producing dynamic and balanced growth
     since 1999. Late 2005 factored stocks amounted to HUF 477 billion. 32 per cent of factoring
     is related to trade, 21 to services, 20 to the industry and 13 to the construction industry.
     In Hungary factoring constitutes only 2 to 3 per cent of short-term financing solutions,
     while this rate is around 10 per cent in developed European countries. The Hungarian
     factoring market has the potential to develop, though it falls behind international
     tendencies. Nevertheless, its catching-up process may be accelerated with targeted
     intervention, in order to facilitate SMEs’ access to financing resources. Factoring may
     offer a solution to the problem of circular debt for small and medium-sized enterprises.




                                                             3
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                              2.
Due to low paying morals and the widespread „chain of debts” typical of Hungary,
the scope of the latter estimated to be 200 billion HUF in March 2007, classical credit
insurances should be assigned a greater role for small to medium-sized enterprises,
besides factoring. At the same time, Hungarian companies do not typically make use
of these insurances yet, presumably for cost cutting reasons. According to surveys
undertaken at the end of 2006, 6 per cent of enterprises in Western Europe have credit
insurance, while in Hungary this can only be measured in thousandths.

The Hungarian leasing market is of fundamental significance when it comes to financing
the investments of small to medium-sized enterprises. In terms of size, the leasing
market grew from HUF 411 billion in 2000 to HUF 1,174 billion in 2005 and reflects positive
results even in European comparison. In 2006 member companies of the Hungarian
Leasing Association financed assets (construction, agricultural, IT and other machinery,
boats, airplanes, railway, motor vehicles and cargo vehicles and property investments)
and property investments in a value of HUF 1,200 billion, nearly 30 per cent of this was
provided to small and medium-sized enterprises. In the form of asset-based financing,
leasing is the most efficient and most flexible form of the typically low-capital SME
sector. The leasing market could grow at a pace equal to that of economic growth or even
exceeding it slightly. In each segment of the market, major changes can be anticipated.

The capital market is underdeveloped in Hungary. Actors of the Hungarian venture capital
market include institutional investors, business angels and enterprises performing
inter-company development capital investments. Institutional venture capital investors
are pooled in the Hungarian Venture and Private Equity Association. Their statistics is
illustrative of the asymmetric situation of the Hungarian venture and private capital
market.




                                            39
2.                                           SITUATION ANALYSIS




      venture and private capital investments, 1999–2006
                             1999    2000    2001     2002         2003             2004             2005             2006
      Business size                                               million      million      million      million
                                        pieces               pcs.         pcs.         pcs.         pcs.
                                                                   eur          eur          eur          eur
      Below EUR 1 million      4      26         17    14     19           4   22          9    1           5   32       .9
      EUR 1–2,5 million        3       7         5      7      9          15   11          17    4      5.4      3        4.6
      EUR 2,5–5 million        3       7         3      2      0           0    1          3     1      2.6      2        .
      EUR 5–15 million         2       7         3      3      1          13   5           37    2          1    1      11.7
      Above EUR 15
                               0       0         0      3      3          5    2          42    1      100       1     500.0
      million
      All businesses          12      47      2       29     32               41               26*              39
      Total business size
                              3     111         71   127             117              10              131             534.0
      (million EUR)
      Average business
                              3.2     2.4     2.5     4.4             3.7              2.6              5.0              13.7
      size (million EUR)
      Source: Hungarian Venture and Private Equity Association
     * Note: The total number of known transactions is 30. The amount is not available in the case of four
       transactions, thus these are not included in the statistics.


     Similarly to former years, also in 2006 most investments were made in size ranges
     below EUR 2.5 million in Hungary. The number of transactions falling into this category
     made up 90 per cent of all investment transactions, while these investments received an
     extraordinarily small 2.6% share of the total value invested. In the field of early-phase
     transactions requiring relatively less capital amount, state engagement was especially
     marked. In 12 cases out of the 16 start-up or early stage companies into which investments
     were made in 2006, the venture capital investor providing the capital was a state-owned
     one.

     For potential Hungarian institutional investors interested in the SME sector it provides
     important security and thereby more advantageous conditions for investment that at
     the end of 2006 capital guarantee products claimable for venture capital investment
     appeared also in Hungary.

     Besides venture capital funds, as alternative private capital investors, business angels
     may fulfil a potentially major role in the lives of innovative small and medium-sized
     companies as well as start-up companies. In 2006 there were 30 active business angels,
     and about 200–230 potential ones.

     On the basis of analyses we would present weaknesses of SME financing in the following
     structure:




                                                             40
Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                      2.

                                                 problem tree



     High operational
    and transactional
                                   2. Difficulties in                Human resource             Infrastructural
   costs of enterprises,
                                  access to finances                  weaknesses                 deficiencies
   barriers of economic
        regulation




   Slowly growing                                    Difficulties              Difficulties       Problems with
                            Tax absorption
   own resources                                  in SMEs’ access           in SMEs’ access         purchaser-
                                                      to credit                 to credit        supplier financial
                                                                                                   relationships,
                            High taxes and                                                        factoring, debt
  Low profitability
                            contributions                                                          management
                                                      Start-up
                                                                            High transaction
                                                    enterprises
                                                                              costs, due to
                                                  have no financial
                                                                                high costs
         Low                                         history for                                 Weak bargaining
                                                                              of collecting
     willingness                                     evaluation                                     position
                                                                               information
      to save                                                                                      of SMEs in
                                                                                on SMEs,
     and invest                                                                                   agreements
                                                   No adequately             necessary for
                                                                                                    between
                                                    flexible risk             investments
                                                                                                   companies
                                                     and cover
     Inadequate                                   management at
       financial                                  credit institutes                               Deficiencies of
                                                                            More difficult to
    awareness at                                                            exit from small        debt recovery,
         SMEs                                                                enterprises            shortfalls of
                                                                                                  debtor informa-
                                                  Higher credit risk                                tion systems
                                                    due to SMEs’
                                                     profitability
                                                                                High risk of
                                                  and disadvanta-                                   Low rate of
                                                                             investment into
                                                   geous resource                                 naked factoring
                                                                            innovative SMEs,
                                                      structure
                                                                             underdeveloped
                                                                              capital market
                                                                               instruments         Widespread
                                                                                to support         “chain debt”
                                                        Inadequate
                                                                                innovation
                                                           cover

                                                                                                     Option of
                                                     For reasons                                  factoring is not
                                                                               High risk of       known enough
                                                    of economies            investment into
                                                    of scale, too            smaller-scale
                                                    high relative             transactions
                                                     transaction
                                                        costs

         Pillars
                                                 Inadequate finan-
         Cornerstones
                                                 cial awareness on
                                                  the part of SMEs
         Specific factors




                                                            41
2.                                                  SITUATION ANALYSIS




     2.3.4. Knowledge

     One of the key elements in the development of small to medium-sized enterprises is the
     availability of human resources in the appropriate quantity and quality. From the point
     of view of the SME-strategy, factors of special importance include the knowledge, skills,
     qualifications of managers and employees, their ability to constantly develop and revise
     their knowledge, the efficiency of supported training and advisory services, as well as
     entrepreneurial skills.

     The development of entrepreneurial knowledge may cause the skills and competences
     of disadvantaged employees working at SMEs to develop too, as a result of which their
     future position on the labour market can improve.

     New enterprises are only started by individuals with adequate entrepreneurial skills and
     motivation. Within the Hungarian population the rate of enterprises now in the start-
     up phase is very low, with the rate of already started but early stage enterprises also
     remaining below the international average.10 Over the past years, willingness to start up
     companies has significantly deteriorated. Only 16 per cent of Hungarians stated that
     they saw business opportunities. The majority of the population believes they lack the
     knowledge and skills necessary for entrepreneurship.

     The quality of corporate human resources is determined by the Hungarian education
     system. The issue of education and training, and within that, the topic “education and
     training in entrepreneurship”, which is the top line of action identified in the European
     Charter of Small Enterprises, receives special importance through the fact that in SME
     strategies of the majority of EU Member States greater emphasis is placed on the
     development of education and training than in Hungarian strategies so far.11 In Hungarian
     secondary and higher education students are provided with less entrepreneurial skills
     than normally in the EU.

     Vocational training has a key role in improving employment and is of decisive importance
     from the point of view of labour market opportunities. In Hungary the activity rate is
     0 per cent for degrees obtained in higher education and 67–70 per cent for secondary
     vocational education. For people without a vocational qualification, which category
     includes 2 million, the activity rate is 27 per cent. This is clearly illustrative of labour
     market chances. The latest amendments to the act on vocational training created the
     legal background for economic actors to become increasingly involved in vocational
     training (Act LXXVI of 1993 and its implementation regulation). As of 2007 an important
     change affecting the regulation of vocational contribution, a major source of financing
     vocational training, is that micro and small enterprises may spend up to 60 per cent of the

     10 Global Entrepreneurship Monitor (GEM) 2005. Development of factors influencing entrepreneurial activity and
        entrepreneurship in Hungary after the EU accession.
     11 Training of entrepreneurs, education of entrepreneurial skills in EU comparison, and recommendations on further training
        (development). Market Economy Foundation, 2005.




                                                                    42
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                              2.
payable contribution on the education of their own employees, and other entities subject
to this contribution may do so to maximum 33 per cent.

The number of employees participating in formal adult education is very low, with the
concentration of formal knowledge heavily dependent on company size: the rate of
employees at micro enterprises taking part in formal training is much lower than in the
case of bigger companies.

 participation of entrepreneurs and their employees in education and further training, per employee
 headcount category (%)
                                      0              1–9             10–49            50+
                                                                                                      total
                                   employee        employees       employees       employees
 Received some sort of training       23.6             29.7            59.7            6.7            27.6
 Did not receive any training         76.4            70.3            40.3             13.3            72.4
 total                               100.0           100.0           100.0           100.0            100.0
 Source: representative MoET entrepreneurial survey, 2007



While conditions of e-education are provided in the general and higher education, we
have a significant backlog in the field of vocational training, adult training and life-
long learning, compared to developed countries. The fact that distance learning and
e-education methods are rarely used reflects that for Hungarian employees life-long
learning is not a requirement (or an opportunity) in practice.

The Hungarian situation is also controversial in the field of eSkills, including the abilities,
knowledge and attitudes of employees related to the application of ICT tools. Our greatest
backlog compared to the European average is the rate of employees using PCs with
internet connections: with 20.6 per cent we are the last in the ranking of the EU-25. At the
same time, the 20.1 per cent of employees with ICT application skills exceeds the EU-25
average (which is 1.5 per cent) and ranks us fifth on the list according to this indicator.
Our backlog is not significant in terms of the rate of employees with ICT expert skills
(2.9 per cent compared to 3.1 per cent in the EU-25).

R&D human resources are also scarce: the number of researchers per 1,000 employees
is 3.9, while the EU-15 average is 6.1 - and this despite the fact that in Hungary the
rate of employment in the total population is likewise lower than the European average.
The overwhelming majority of corporate R&D activities is concentrated in the field of
technology, but development is hindered by the low number of fresh graduates in natural
sciences. Their rate does not reach half of the EU-25 average in the below-30 age group
per 1,000 persons, with only Cyprus, Malta and Luxembourg ranking behind us. There
is a significant shortage of technicians and skilled workers, too. There is inadequate
flow of knowledge between the research and the business spheres. Economic aspects
are not considered in the management of publicly financed places of reserach, in
the selection of topics to be researched or in the evaluation of researchers. Dynamic
growth is impaired in certain cases by stiff, autocratic structures, with most budget-


                                                     43
2.                                   SITUATION ANALYSIS




     financed places of research in need of reforms. Hardly any expert-switching takes place
     between publicly financed places of research and companies, and researcher mobility is
     unsatisfactory between various institutes and fields of research too. Between 2000 and
     2004 the average number of job changing per researcher was merely 0.11. No solution
     is in place for the motivation and support to the repatriation of young researchers after
     employment abroad.

     On the basis of analyses we would present weaknesses of human resources at SMEs in
     the following structure:




                                                44
Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                           2.

                                            problem tree



   High operational and
   transactional costs,        Difficulties in              3. Human resource         Infrastructural
   barriers of economic      access to finances                 weaknesses             deficiencies
        regulation




    Deficiencies in the    Deficiencies of external             Inadequate
                                                                                    Inadequate level of
    internal factors of     factors of company              (vocational) training
                                                                                     entrepreneurship
  company management            management                     of workforce



       Shortfalls in                                                                    Not enough
                             Inadequate access                  Insufficient
   managerial compe-                                                                  entrepreneurial
                               to information                  general skills
   tencies and know-                                                                    willingness
                                                              (eg. Languages,
    ledge of company
                                                             finances, eSkills)
        managers

                           Inadequate efficiency                                     Low level of social
      Shortfalls in              of supported                                        recognition of the
                                                              Deficiencies of
      education of          training and advisory                                   entrepreneur status
                                                           specialised knowledge
    management and                 services                    of employees
    leadership skills
    in school-based                                                                     Low level of
        education                                                                     innovativeness



      Insufficient pro-                                                                 Education in
   fessional knowledge                                                                technology is not
     of SME managers                                                                linked to education
                                                                                         of business
                                                                                        competences

    Inadequate use of
     company quality,                                                                    Insufficient
  environment and other                                                                   education
  management systems                                                                  of competences
                                                                                       necessary for
                                                                                           start-up

    Inter-firm business
     relationships not
      efficient or well-
     organised enough




  SME management does                                  Pillars
   not make sufficient
   use of the results of                               Cornerstones
   scientific research
                                                       Specific factors




                                                      45
2.                                                  SITUATION ANALYSIS




     2.3.5. entrepreneurial infrastructure

     2.3.5.1. Use of Information and Communication Technologies (ICT)

     In recent years the use of information technology increased considerably at small to
     medium-sized enterprises. While the rate of small enterprises using a computer was not
     more than a third in the late nineties, by 2007 this figure rose to near two-thirds.12 An
     even faster growth occurred in the rate of enterprises with an internet-connection. In
     2007 3 per cent of enterprises owning computers also boasted an internet-connection.

     As regards broadband access, however, which is a determining element of the physical
     infrastructure, Hungary falls behind the European average considerably. The backlog in
     broadband internet penetration by the enterprises is especially significant. Penetration
     is 61.3 per cent in Hungary and 74.5 per cent on average in the EU-25. The backlog is in
     inverse proportion to company size: big companies are at an identical level, with a nearly
     50 per cent gap to the SME sector.


                            Broadband penetration rate (households, enterprises) (%)

         100

          80

          60

          40

          20

            0
                 Slovakia     Poland      Hungary       EU-8         Czech          Spain      EU-25        Estonia      Finland

                Broadband penetration    Households – level of BB internet access      Enterprises level of BB internet access


     Source: White Paper on Information Society, MoET Working Document


     An important condition to the establishment of the physical infrastructure is the issue
     of security. The weight of security in business decisions is lower in Hungary than the
     European average: in 2006 the rate of companies using secure servers was 19.4 per cent
     (the EU-25 average was 41 per cent), and that of companies using digital signatures was
     7.4 per cent (EU-25 average 14.3 per cent), with which we ranked as the last country in
     the EU-25.

     The frequency of use of modern IT appliances also falls behind the European level in the
     Hungarian corporate sphere. The European e-Business Report 2006/2007, commissioned



     12 Results of representative MoET entrepreneurial survey, August 2007




                                                                   46
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                                    2.
by the European Commission,13 found Hungary to rank last among the 10 surveyed
Member States in terms of the examined e-business index data, falling behind the
best-performing Member State by 44 percentage points. Another relevant survey, the
eReadiness ranking of the Economist Intelligence Unit (EIU)14 found the situation to have
deteriorated since 2005, as we slid back from ranking 30 to 32. 4.5 per cent of Hungarian
companies had integrated internal company processes in 2006, and 5.4 per cent had
integrated external company processes, while the EU-25 averages were 37.3 per cent
and 13.5 per cent, respectively. The use of integrated company management systems is
only typical of big companies (72 per cent according to a 2006 GKIeNet survey). Medium-
sized enterprises follow them with a sizeable backlog (34 per cent) while corporate
process integration is at low levels at Hungarian small and medium-sized enterprises.


                Companies having internal and external corporate processes (%)

      60

      50

      40

      30

      20

      10

       0
              Hungary          EU-8         Poland        Slovakia       Estonia         Czech          EU-25         Finland

               Companies having internal corporate processes          Companies having external corporate processes


 Source: White Paper on Information Society, MoET Working Document


It is worth examining the role of electronic commerce at Hungarian companies. This
can best be illustrated with its rate to the total corporate turnover, and with the weight
of electronic sales and orders. On both areas there are significant gaps to EU-15 and
EU-25 averages: In 2006, 6 per cent of sales revenues of Hungarian companies came
from eCommerce, compared to the 11.7 per cent of the EU-25, Hungary ranking 15th in
the Union.




13 http://www.ebusiness-watch.org/
14 For the eReadiness ranking of the EIU nearly 100 quantitative and qualitative features were surveyed at companies, using
   the following categories: technological infrastructure, business environment, adaptation of ICT among consumers and the
   business sphere, legal and political environment, social and cultural environment, e-services. The survey is available at this
   address: http://www.eiu.com/site_info.asp?info_name=eiu_2006_e_readiness_rankings.




                                                                 47
2.                                               SITUATION ANALYSIS




                        figures of eCommerce and internet purchases/sales (%)

         60

         50

         40

         30

         20

         10

          0
               Latvia      EU-8         Poland     Spain      Hungary       Czech     Slovenia      EU-25      Finland

         eCommerce/corporate turnover     Companies accepting orders the internet   Companies purchasing on the internet


     Source: White Paper on Information Society, MoET Working Document


     Our position is slightly more disadvantageous in terms of internet-based orders. The
     rate of companies accepting orders via the internet was 10.7 per cent in 2006 (the EU-25
     average was 13.9 per cent), while the rate of companies purchasing on the internet was
     12.2 per cent (37.9 per cent in the EU-25): we are one of the laggards as we occupy the
     16th and the 24th positions among the EU-25 with our figures.


     2.3.5.2. R&D Activity and Infrastructure

     Research and development (R&D) expenditure amounted in GDP percentage to 0.9 per
     cent in 2004, 0.95 per cent in 2005. In 2004 HUF 11.5 billion and in 2005 HUF 207. billion
     was spent on R&D activities. Expenditures fall significantly behind the 3 per cent target
     set by the EU at the Barcelona Summit, as well as the 1.9 per cent EU average. According
     to a HCSO report, enterprises increased their expenditures by 15 per cent in 2004:
     within the total R&D expenditure the share of enterprises amounted to 29.7 per cent in
     2002, 30.7 per cent in 2003, 37.1 per cent in 2004 and 39.4 per cent in 2005. The rate of
     corporate and state R&D expenditures is still 0.71:1 in Hungary, whereas the EU average
     is the reverse: 1.6:1. More than 70 per cent of corporate R&D expenditures (precisely
     73%) is given by companies in the processing industry. In terms of R&D expenditure
     the construction industry, the food industry, electricity-supply, as well as the postal and
     telecommunications sectors are far behind their economic weight. Sectors having some
     development potential from the point of view of small and medium-sized companies and
     human resources are the motor vehicle industry (vehicle control, sensor technologies)
     and the food industry. Also promising is the development in the production of road
     vehicles and communication devices.

     According to HCSO data 749 companies pursued R&D activities in Hungary in 2005. The
     role of the Hungarian SME sector in research and development lags far behind that of
     big companies. The strong concentration is indicated by the fact that 17 companies bear
     half of the total Hungarian corporate R&D costs, and nearly 0 per cent of corporate


                                                              4
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                                        2.
research is carried out at companies with foreign ownership. At the same time, only
2 to 3 per cent of Hungarian small and medium-sized enterprises may be considered
as pioneers of innovation, with another 20 to 22 per cent as their active and adaptive
followers. A Eurostat survey presents similar findings, according to which only 21 per
cent of Hungarian companies with a 10-plus headcount are pursuing any innovation-
related activity, which is half the EU average. A Eurostat survey presents similar findings,
according to which only 21 per cent of Hungarian companies with a 10-plus headcount
are pursuing any innovation-related activity, which is half the EU average.

Closely related to unsatisfactory innovation activity, the industrial rights protection
activity of these companies is also low. 40 per cent of enterprises15 have some kind
of relationship with industrial rights protection: 12 per cent pursue industrial rights
protection activities, 21 per cent had some kind of protection and 7 per cent had purchased
a licence. Among different forms of protection, trade mark protections are held by the
most companies. The gap between companies aware of industrial rights protection
issues (65%) and enterprises pursuing industrial rights protection activities signals the
potentials in industrial rights protection, which is waiting for future exploitation.

 In the provision of business infrastructure industrial parks play an important role.16 Since
 1997 the Ministry of Economy has issued a call for tender every year for winning the
“Industrial Park” title. In 2005 the number of industrial parks grew in Hungary, reaching
 179. By the end of 2005 parks awarded the ’Industrial Park’ title had a total area of 9.70
 hectares, where 2,55 ventures were operating with 154,000 employees altogether.
 According to March 2007 data, 11 more tenderers have since been awarded the title
‘Industrial Park’.

  major figures about the industrial park programme (1997–2005) (data are rounded according to calendar years)
  features                                     1997      1998      1999      2000      2001      2002      2003      2004      2005
 Number of industrial parks (pcs)                2        75        112      133       146       160       165       165       179
 Occupancy rate (%)                            21.5      30.0      34.5      32.9      3.4       40.1      42.7      47.0     50.4
 Number of enterprises (pieces)                 320       65       90      1495      1760      2152      2450      2571      255
 Headcount (thousand employees)                  27        59         2       110       115      12       139       145       154
 Investments of enterprises
                                                166       316       427       662      1003      1264      1256      1540      1704
 (billion HUF)
 Sales revenues of enterprises,
                                                619       930      1651      2665      3294      343      3430      465      500
 (billion HUF)
 Source: MoET




15 Early 2006, at the request of the Hungarian Patent Office, with cooperation of colleagues from the industrial rights protection
   information network of the Hungarian Chamber of Trade and Commerce, a questionnaire-based survey was conducted about
   the level of awareness of industrial rights protection issues at Hungarian enterprises, covering nearly 500 of them. Main
   conclusions of this analysis were published in the White Paper on the Protection of Intellectual Property – 2006.
16 Industrial park is a legal category, which means an area of at least 20 hectares, furnished with infrastructure, granted the title
  “Industrial Park”, housing production and service activities.




                                                                  49
2.                                    SITUATION ANALYSIS




     The development of industrial parks is nowadays primarily ensured by SMEs getting
     settled in them: 95 per cent of 29 new settlers in 2003, 121 in 2004 and 41 in 2005 were
     SMEs. Besides it can be observed that in industrial parks a large-scale concentration
     of the economy took place, with special regard to industrial production, export and
     industrial employment.

     Recently, central innovation initiatives have emerged, which are based on broad
     cooperation, foster networking and are integrative. Regional university knowledge
     centres, cooperational research centres, growth sector programmes, big international
     programmes and regional innovation agencies are cases in point.

     However, there are few spin-off enterprises “swarming out” of these knowledge
     centres. The institutional weakness of the Hungarian innovation system is that the
     technological and business incubation serving the strengthening of innovative SMEs is
     underdeveloped. The principle “industrial park + incubator service” is implemented in
     practice currently only to a limited extent. Institutional, network structures (innovation
     centres, technological transfer centres, technological incubator houses) connecting R&D
     institutes and companies are either lacking or underdeveloped. There are no efficient
     mechanisms for directing the venture capital towards innovative enterprises. Capital
     market instruments supportive of innovation are underdeveloped.

     On the basis of analyses, weaknesses of the infrastructure can be presented in the
     following structure.




                                                 50
Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                            2.

                                              problem tree



     High operational
    and transactional
                              Difficulties in access           Human resource          4. Infrastructural
   costs of enterprises,
                                    to finances                 weaknesses                deficiencies
   barriers of economic
        regulation




            Deficiencies in                       Shortfalls of
                                                                                Deficiencies of ICT
            basic physical                       business R&D
                                                                                  infrastructure
            infrastructure                         structure



                                                  Deficiencies of                   Inadequate
                                                infrastructure in                  access to ICT
                                               incubator houses,                      network
                                                 industrial parks                 infrastructure,
                                              and industrial sites,                 broadband
                                                 and the related                     networks
                                                     services

                                                                                    Low level of
                                                                                 informalisation of
                                                  Insufficient                  corporate processes
                                                 capacities of
                                                 technological
                                                    centres,
                                                institutional or                ICT not widespread
                                              network structures                      enough
                                                  linking R&D
                                                  institutes to
                                                  enterprises




         Pillars

         Cornerstones

         Specific factors




                                                        51
2.                                           SITUATION ANALYSIS




     2.3.6. a Summary of the problems of the Sme Sector


                                     the problems of the Sme Sector


              1. Regulatory           2. Difficulties in           3. Knowledge-related   4. Infrastructural
                 problems            access to finance                   problems            deficiencies



                                     Slowly expanding                Inadequate level
             Need for further                                                             Deficiencies in ICT
          reduction in time- and      own resources                 of entrepreneurial
                                                                                            infrastructure
          cost-intensiveness of                                         willingness
              market entry
                                    Difficulties in SMEs’
                                      access to credit
                                                                      Deficiencies in        Shortfalls of
                                                                    external factors of   business and R&D
                Regulatory
                                                                        company             infrastructure
           environment causing      Difficulties in SMEs’
          high operational costs                                       management
                                     access to capital



             Problems when             Problems with                  Deficiencies in
          exiting from a market      purchaser-supplier              internal factors
                                   financial relationships,            of company
                                       factoring, debt                 management
                                        management
          Inadequate economic
             and legal safety,                                         Inadequate
            unfair competition                                        (specialised)            Pillars
                                                                     qualification of
                                                                        workforce              Cornerstones




     2.4. Experiences with enterprise development in the previous period

     2.4.1. hungarian programmes

     For the period 2003–2006 the SME development strategy was the Széchenyi Enterprise
     Development Programme (SZVP) adopted in Government Decision 1213/2002. (XII. 23.).
     In the frames of this scheme, among measures supporting SMEs’ access to financial
     resources, the so-called four-step loan programme was launched in Decree 1065/2003
     (VII.15.). This system offering discount loans is operated together with several credit
     institutes and organisations. In addition, other new supportive instruments were also
     developed (factoring, development capital investment institutes).

     In 2005–2006 the nationally financed four-step loan programme was developed further,
     with two of its elements remaining in operation (Micro Credit Programme and Széchenyi
     Card Programme), and two other elements integrated into the “For a Successful Hungary”
     loan programme launched early May 2005 in Decree 1041/2005 (V.5.).


                                                              52
    Strategy for the Development of Small and Medium-sized Enterprises
                                                                                              2.
In the frames of the MicroCredit Programme, in operation since 1992 with its terms
amended on several occasions, 1053 entrepreneurs received micro credit in an amount
totalling more than HUF 3.9 billion in 2005, and 137 entrepreneurs received a total of
HUF 5.9 billion in micro credit in 2006.

A resolution was adopted in 2005 on the multidirectional extension of the Széchenyi
Card programme introduced in 2002. With Decree 1130/2005 (XII.23.) state-funded
operations of the programme are extended to the end of 2010. In 2005 20,633 cards were
handed over, which allowed for the use of HUF 106.5 billion, in 2006 the number of cards
handed over was 21,40 with an issued credit stock of nearly HUF 121 billion.

The Loan Programme “For a Successful Hungary” opened a new chapter in the develop-
ment of the economy, as enterprises in all economic sectors as well as municipalities
now have an opportunity to get access to long-term developmental credit with discount
interest rates. In the frames of the “For a Successful Hungary” Enterprise Development
Loan Programme, credit was issued in 2005 in 2,237 cases, to an amount of HUF 126.5
billion, and in 2006 in 2,904 cases, amounting to HUF 156.5 billion.

Supportive instruments continued to include non-refundable financial support granted by
means of applications. From among tenders financed from the SME Budget Appropriation,
that is, from domestic sources, 4 were advertised by the Ministry of Economy and Transport
in 2005 and 3 in 2006. In 2005, 4 entrepreneurs were granted support – the total sum of
which was HUF 515 million – within the scope of SZVP calls for applications, and in 2006
3 applicants won support of HUF 262. million.


2.4.2. Share of Small and medium-Sized enterprises from eu Co-financed tender
       Support

Since 2004 – being a member state of the European Union – Hungary has been entitled to
utilise the sources of the Structural Funds, the development support of the EU. With a view
to regulating the areas on which EU funds can be used, the first National Development
Plan (NDP)(2004–2006) was compiled, which identified three specific objectives: a more
competitive economy, better use of human resources and facilitation of an improved
quality of environment and more balanced regional development. Achievement of these
objectives was served by five operational programmes:

•   Economic Competitiveness Operational Programme (ECOP)
•   Human Resource Development Operational Programme (HRDOP)
•   Environmental Protection and Infrastructure Operational Programme (EPIOP)
•   Agricultural and Rural Development Operational Programme (ARDOP)
•   Regional Development Operational Programme (RDOP)

In the frames of the operational programmes, calls for applications launched between
2004 and 2006 with EU co-financing made a considerable amount of non-refundable


                                             53
2.                                          SITUATION ANALYSIS




     funds available to Hungarian small and medium-sized enterprises. In the frames of the
     five operational programmes, at calls for tenders launched between 2004 and 2006,
     altogether 12,53 small and medium-sized enterprises received non-refundable funds
     totalling more than HUF 192.5 billion. Approximately half (4.5%) of small to medium-
     sized enterprises which were granted support were micro enterprises and more than a
     third were (34.5%) small enterprises, as shown in tables on the following pages.


     Classification of received Sme projects, by operational programmes
                                               micro              Small        medium-sized
     Category                                                                                      Smes total
                                             enterprises        enterprises     enterprises
                 Number of projects
                                                 3,606               93              66             5,212
                 received
     arDop
                 Support requested
                                               65,039             31,499           32,23           129,361
                 (million HUF)
                 Number of projects
                                                 9,575             7,019            3,020            19,614
                 received
     eCop
                 Support requested
                                               2,239             2,19           66,502           230,939
                 (million HUF)
                 Number of projects
                                                  405                672              536              1,613
                 received
     hrDop
                 Support requested
                                                 2,966             7,73             9,154           19,5
                 (million HUF)
                 Number of projects
                                                    30                25               25                   0
                 received
     epiop
                 Support requested
                                                 9,023             3,919            ,934            21,76
                 (million HUF)
                 Number of projects
                                                  194                122               47                  363
                 received
     rDop
                 Support requested
                                                14,714             9,939            4,270            2,922
                 (million HUF)
                 Number of projects
                                                13,10             ,776            4,296            26,2
     total       received
     nDp         Support requested
                                              173,91            135,294          121,63           430,95
                 (million HUF)
     Data for supported projects and contractual projects do not include projects retracted or withdrawn
     following positive evaluation or contract conclusion.
     Source: Single Monitoring Information System (EMIR) 15 January 2007




                                                           54
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                             2.
Supported Sme projects, by operational programmes
                                          micro               Small        medium-sized
Category                                                                                      Smes total
                                        enterprises         enterprises     enterprises
            Number of supported
                                             1,747                53             475             2,760
            projects
arDop
            Support awarded
                                           35,40               17,715         23,734            77,29
            (million HUF)
            Number of supported
                                             4,145              3,44           1,34             ,941
            projects
eCop
            Support awarded
                                           29,60              36,379          29,972            96,211
            (million HUF)
            Number of supported
                                              161                 323             293                  777
            projects
hrDop
            Support awarded
                                              02                2,747          4,076             7,625
            (million HUF)
            Number of supported
                                                   7                   5               10               22
            projects
epiop
            Support awarded
                                             1,152                603           2,26             4,023
            (million HUF)
            Number of supported
                                                  44                  2               11               3
            projects
rDop
            Support awarded
                                            4,432               2,223             733             7,3
            (million HUF)
            Number of supported
                                             6,104              4,342           2,137            12,53
total       projects
nDp         Support awarded
                                           72,06              59,667          60,73           192,536
            (million HUF)
Data for supported projects and contractual projects do not include projects retracted or withdrawn
following positive evaluation or contract conclusion.
Source: Single Monitoring Information System (EMIR) 15 January 2007




On the basis of representative MoET entrepreneurial surveys less than 4 per cent of
Hungarian small to medium-sized enterprises were provided with enterprise development
services, with the lowest rate in the smallest categories. Remarkably, in comparison to
surveys covering the period back to 1997, no substantial growth can be seen despite
the fact that as of 2001 the sum of budget funds earmarked for this purpose increased
considerably.

 rate of enterprises provided with enterprise development services in hungary (%)
                     enterprise
                                         micro                Small        medium-sized
                      without                                                                    total
                                       enterprise           enterprise      enterprise
                     employees
 Provided                2.6                4.2                 9.6              7.1                  3.5
 Not provided           97.4               95.                90.4            92.9               96.5
                       100.0              100.0               100.0           100.0              100.0
 Source: representative MoET entrepreneurial survey, 2007




                                                       55
2.                                       SITUATION ANALYSIS




     Over the recent period, several impact studies and assessments were conducted, with
     a view to examining the efficiency of each programme. Thus for example a summary
     was drawn up about experiences with micro credit, and the interim assessment of the
     Economic Competitiveness Operational Programme (ECOP) also took place.

     Judging from assessments, major lessons drawn from policies applied so far are the
     following:

     •   The enterprise development policy has not made enough contribution to the develop-
         ment of markets for independently operating financial and/or business development
         services. The development of these partial sub-markets takes place spontaneously,
         which is not a problem itself, but a supportive impact could largely accelerate this
         process on many areas.
     •   Only a few percent of Hungarian enterprises received palpable support from the
         enterprise development system.
     •   As a result of strongly limited access, the majority of enterprise development tools
         do not meet the criterion that they should make an impact without distorting the
         competition.
     •   At certain enterprise development organisations a rent-seeking kind of behaviour has
         emerged, with little interest in the actual result and the bulk of efforts tied up in ensuring
         financial resources.
     •   For the use of direct aid administrative control is required, which increases the
         administrative burden on resource allocation. Partly due to this, the amount of aid
         is high for reasons of economies of scale, which poses especially big trouble for
         the smallest enterprises.
     •   Especially in the case of direct aid the so-called deadweight loss effect occurs frequently,
         which means that those developments are financed which would be implemented
         without aid too.
     •   The market distortion effect is unavoidable, and the low number of beneficiaries
         are provided advantages compared to other players which are not justified by
         market processes. It is difficult to justify that beneficiaries are a narrow group of
         entrepreneurs.
     •   After a one-time intervention the programmes are not continued and the impact is
         not a lasting one. If the availability of extra resources were terminated or reduced,
         development instruments would be operating on a much lower level than before.




                                                     56
                                                                                              3.




                             SWOT ANALYSIS



 The SWOT analysis has been compiled in consideration of the documents serving as
 the basis for the strategy and on the basis of the integration of the SWOT analyses of
 the programmes. From these the present analysis primarily summarises SME-specific
 findings. Following from the heterogeneity of this sector it is obvious that some of the
 factors mentioned here are only pertinent to certain subgroups of enterprises. The bullet
 points “Strengths” and “Weaknesses” describe the current situation and the internal
 features of the sector of small to medium-sized enterprises. Under “Opportunities” and
“Threats” expected future developments and potential consequences of the current
 trends are summarised. While strengths and weaknesses are a group of factors that can
 be influenced by a given sector, in this case by the SME-sector, opportunities and threats
 mean all the external circumstances, which are difficult for enterprises to influence.
 Consequences drawn from the situation analysis and the four elements of the SWOT-
 analysis allow us to outline the future vision of the SME-development policy and to set
 the objectives of the strategy.




                                             57
3.                                          SWOT ANALYSIS




     Strengths                                     Weaknesses

     •   Experience obtained in a competitive      •   Income producing ability and
         environment during nearly twenty              productivity falling far behind the
         years of economic transition                  European standard
     •   Flexibility, ability to adapt quickly,    •   High rate of inefficiently managed
         specialisation                                enterprises with low capital
     •   New generations of entrepreneurs          •   High labour and low capital intensity
         enter the market                          •   Weak ability and willingness to
     •   A large number of fast-growing                accumulate capital
         enterprises                               •   High rate of companies with low
     •   Emerging and gradual spreading of             performance, outdated technology
         entrepreneurial networks reducing             and low levels of efficient energy
         the competitive disadvantage                  consumption
         compared to big companies; emerging       •   Rate of enterprises using external
         and growth of SMEs’ capacity and              sources is low in international
         willingness to organise networks              comparison
     •   Improving financial culture and           •   SMEs’ financial awareness and
         financial awareness                           planning underdeveloped
     •   Continually growing rate of               •   Few entrepreneurs having basic
         enterprises achieving the financing           business knowledge, IT qualification,
         minimum (having a relatively long             language skills and other core
         record of operations, stable income-          competences
         producing ability, with a need for
         financing)                                •   Not enough well-prepared to make
                                                       their activities international, to enter
     •   Significant ICT sector, well developed        the single market
         in terms of some of its elements
                                                   •   Labour market issues (low rates
     •   Increasing use of ICT in relationships        of labour market activity and
         of banks and customers as well as tax
                                                       employment, hiding income obtained
         authorities and taxpayers                     through work, life long learning is
     •   Hungary’s advantageous geographical           not general, low rate of labour force
         location from logistical and cultural         mobility, flexible and atypical forms of
         aspects                                       employment less common)
                                                   •   Low rates of R&D expenditure,
                                                       capacity and innovation activity
                                                   •   Few patents and individual products
                                                   •   Too much concentrated corporate
                                                       R&D activity
                                                   •   High relative transaction costs on
                                                       several areas
Strategy for the Development of Small and Medium-sized Enterprises
                                                                                           3.

Opportunities                                 Threats

•   Through the intensifying globalisa-       •   Slowing development of the SME
    tion of the world economy the range           sector, increasing competitive
    of available resources, markets and           disadvantage to big companies
    cooperations is expanding                 •   Environmental changes slowing down
•   Growth industry knowledge centres +           or complicating the accumulation
    emerging and developing high poten-           of own resources, eg. increasing
    tial Hungarian SMEs’ networks                 taxes and contributions, restrained
                                                  consumer power
•   Hungarian SMEs’ integration into big
    international production, service and     •   The opening European labour market
    trade networks                                may exercise a draining effect
                                                  on highly qualified experts and
•   With the accession to the Eurozone
                                                  researchers
    the exchange rate risk diminishes/
    disappears, transaction costs decrease    •   Shortage of professionals (skilled
                                                  workers and degree-holders)
•   With ICT developing and spreading,
    network cooperation intensifies           •   Adapting to ever tightening environ-
                                                  mental and other requirements related
•   Innovation act and tax allowances to
                                                  to EU-accession is cost-intensive
    encourage researchers to found enter-
    prises, to provide incentives to R&D      •   The slow convergence process, the
                                                  delay in the introduction of the Euro
•   Adaptation to environmental and
                                                  increases the exposure of Hungarian
    sustainability efforts provides
                                                  enterprises to exchange rates and
    opportunities for market and
                                                  drives up their transaction costs
    technology development
                                                  compared to those of their regional
•   Recognition of the strategic importance       competitors
    of education, and improvement of its
    quality at all levels                     •   Resulting from macroeconomic
                                                  changes, SMEs’ creditworthiness
•   High growth potential on supply-side          deteriorates, while the risk of
    of external resources, improving              financing and the level of interest
    offers of financial providers, spread-        rates increase
    ing of more efficient and cheaper risk
    management procedures                     •   Cumbersome, bureaucratic public
                                                  administration
•   Appearance of a wide range of financial
    tools, option of applying more devel-     •   Unpredictable, inconsistent regulatory
                                                  environment
    oped and diversified financial tools
•   Growth of the clientele that reaches      •   SME development policy and
                                                  programmes that reach relatively
    the financing minimum, is active and
                                                  few entrepreneurs and work with low
    uses services
                                                  efficiency
•   Increasing the depth of financial me-
    diation, in part through more services
    provided to existing customers,
    in part through new customers
•   Implementation of state enterprise
    financing policies that are more
    efficient and reach more enterprises
4.




                  FUTURE VISION (TARGET STATE)



     The SME-development policy is part of the economic policy, the formulation of which
     requires many other priorities to be likewise considered. Our vision for the future is a sector
     of small and medium-sized enterprises which retains and enhances its competitiveness
     and, growing together with the competitive sphere, increases employment and income
     production in the whole macro economy, whereby the integration of the Hungarian
     economy into the global economy and the single market is facilitated. In an enterprise-
     friendly and innovation-stimulating environment, capitalising on developed humane
     and physical infrastructure, internationally competitive companies, among them small
     and medium-sized companies operate.

     A sound SME development policy is a combination of the legal/regulatory environment
     and the enterprise development instruments which, in the given economy, best serves
     the sustainable development and lasting growth of small and medium-sized enterprises.
     Main elements and features of the policy to be followed in the future are the following:

     •   Low barriers to (market) entry, cheap and not time-consuming company foundation and
         licensing. Conditions to market entry are determined partly by the legal and regulatory
         environment, and partly by the market. The governmental policy must strive to keep
         barriers low in the first category, that is, transaction costs of company foundation.
     •   Taking into account the given budget situation, competitive taxation and contribution
         burdens. The balance of the budget should primarily be achieved rather through cost
         cutting than through a rise in revenues.
     •   Conditions of running an enterprise are stable. Taxation, accounting, company law and
         other legislation or regulators are only amended when this is justified. Allowances,
         breaks are not just related to economic cycles. Conditions of operations can be
         foreseen relatively exactly in a perspective of up to several years. Macroeconomic
         conditions (eg. exchange rates, interest rates) primarily follow natural market growth
         when changing. Stability contributes to enterprises’ cutting of operational costs.
     •   Administrative burdens of operating enterprises, and as a result transaction costs, are
         low. These are adapted to the actual capacities of enterprises. Smaller enterprises are
         free to choose simpler forms of taxation procedure.


                                                   60
    Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                  4.
•   Action against informal economic activity (especially tax evasion and not registered
    activity) is a combination of incentives and sanctions, with the main objective of
    gradually integrating informal economic activity into the formal economy. Thereby
    an increase in the employment of disadvantaged groups can also be expected.
•   Licensing procedures are simple and transparent, which does not only help to keep
    administrative burdens at a low level but also gives significantly less room to corruption.
•   Rights of owners of enterprises are clearly regulated, compliance is enforced by law.
•   Legal safety is upheld both in inter-company relationships and between the state and
    private enterprises. Impartial legal recourse is available against public administration
    decisions.
•   The overwhelming majority of the Hungarian labour force is qualified and competitive.
    In terms of personality they are characterised by creativity, entrepreneurial spirit,
    ability for team work and cooperation and life long learning.
•   Hiring employees can be done with simple administration, their termination can take
    place at reasonable costs, albeit meeting the principle of fairness. This may not mean any
    increase in uncertainty for employees or a decrease in the level of their protection. Tax
    and contribution burdens on wages are reasonable and do not harm competitiveness.
    Also, they do not encourage masses to evade their payment obligations.
•   Prices of business and financial services used by enterprises are shaped by the market,
    with the possibly lowest number of factors impeding competition on this area too. The
    rate of obligatory services is low, the demand is constrained by government policies
    as little as possible, which contributes to reducing prices and keeping them low.
•   Enterprise development policy is targeted at the development and market operation
    of sustainable financial and business services. Already working markets are not
    disturbed. Interventions are temporary and in a significant share of the cases lead to
    the establishment of structures that operate in a self-sustaining manner. The Govern-
    ment cooperates with market actors providing enterprise development and business
    services. Regulations facilitate the use of such services.
•   In public procurement procedures small and medium-sized enterprises are at no
    disadvantage compared to bigger companies.

One of the most important tasks of the SME policy is to cut (broadly defined) transaction
costs of entrepreneurial activity. The overwhelming majority of transaction costs is
influenced directly or indirectly by government policies. Through a reduction of these
costs enterprises have access to significantly more resources than through direct aid.




                                               61
5.




                           STR ATEGIC DIRECTION



     5.1. Principles of intervention

     Regarding the application of measures and instruments affecting enterprises
     indirectly (improvement of regulatory environment) or directly (financial programmes,
     infrastructure, development of knowledge) we have defined the following principles.

     The main principle of intervention for measures taken on the regulatory field is that
     the burden on enterprises should be reduced in a way that all the indirect and direct
     costs incurred at enterprises due to state regulation are taken into account, while
     also observing aspects of the budget balance, because both direct and indirect costs
     take resources away from exploitation of market opportunities and thereby decrease
     enterprises’ competitiveness.

     The basic principle of applying direct development instruments is that the Government
     mainly provides public services, and only temporarily private services. State interventions
     must contribute to the development of lacking or not satisfactorily operating markets. This
     objective may be reached through the sustainability of programmes, which allows both
     the efficiency and the range (range meaning the number of eligible enterprises having a
     potential for development) to be raised to a higher level than in the case of programmes
     supported permanently with high intensity. The Government intervenes, launching
     concrete programmes or services, if and when the following conditions prevail:



     •   Market insufficiency: A problem prevails which is not managed or inefficiently managed
         by the market. Intervention is especially justified when the supply-side of the market,
         out of direct business considerations, does not develop services for which there is
         already a demand on the part of enterprises.
     •   The private service realised through development becomes, in a perspective of a few
         years, a public service. This is to say that the support does not finance bad efficiency
         of the actors but the development of a new service.




                                                   62
    Strategy for the Development of Small and Medium-sized Enterprises
                                                                                              5.
In consequence, the Government does not intervene directly into working markets of
private services, does not launch market disturbing programmes and does not provide
subsidised service if sufficient market solutions are existing.


5.1.1. main intervention principles

In the course of planning and implementing the intervention measures defined in the
strategy the following basic principles were identified:

Principles of regulation-related interventions:
•  For the sake of optimum state regulation that strengthens economic competitiveness,
   superfluous, meaningless state regulations and regulatory proceedings with outdated
   objectives and/or techniques must be made void or if possible simplified, modernised,
   made less “burdensome”. Institutional cooperations should be made more efficient,
   infrastructural conditions should be developed.
• Public administration procedures concerning the company/entrepreneurial sector
   should not be adapted to public administration organs and their procedural orders,
   as was the former practice. Instead, procedures must be developed and implemented
   which primarily consider customers’ interests, follow processes and adapt to these.
• Legal safety and clearness, necessary for competitive operations of enterprises and
   efficient working of product and service markets must be reinforced through ensuring
   the conditions for law enforcement, and through extending the range of information
   on economic actors and transactions.

In the case of direct programmes providing development services to enterprises, main
intervention principles are the following:

A functional approach: When developing policies, functions and not organisations
should be accepted as starting points. Thus a significantly wider perspective of possible
measures opens up. Organisations entrusted with implementation must be those which
can best serve this purpose.

Sustainability: The high donor dependence of programmes must be reduced. This should
not be done for reasons of sparing budget resources in the first place, but because
the ability for subsistence is an incentive and a measure of customer-oriented, useful
services. Without this, the donor remains the most important customer instead of the
entrepreneur.

Institutional development, capacity building: It is not the financing of the operation that
should be set as the overall aim of the policy, but the formation of structures capable of
operating in a self-sustaining manner. One instrument for this is institutional develop-
ment, which creates legal and other regulatory conditions under which subsistence can
be achieved, another is capacity building, which means the evolvement of instruments
(for example organisations efficiently providing micro credit).


                                            63
5.                                   STRATEGIC DIRECTION




     Coordination based on market mechanisms: Market coordination, competition and
     enforcement of the efficiency constraint allow for the growth in the production of added
     value to become the measure of success, as enterprises are only in the position to
     expand their employment, be competitive and operate in a stable way if their income
     production is on the increase.

     Attempts must be made to minimise the individual administration of development
     instruments. If the programmes are based on large-scale implementation of the principle
     of market investor and market creditor, a significantly simpler approach is possible.

     Access to finances is possible on objective, transparent terms. In the case of pro-
     grammes with identical functions, identical framework conditions must be applied,
     with implementing organisations having to compete in efficiency of implementation.

     An important consideration is that a given amount of public financing should mobilise
     the maximum possible amount of private resources. By remedying market insufficiencies,
     the programmes should facilitate enterprises’ access to financing resources and services
     on the markets. An important measure of efficiency is the size of the leverage between
     public financing and mobilised private resources.


     5.1.2. expected advantages of implementation of the intervention principles

     It may be expected that over the next planning period the programmes will reach
     significantly more enterprises, up to several times of the current couple of thousand.
     This will lead to a growth in income production both at individual enterprises and on
     macro-economic level.

     The programmes will have a lasting effect, remaining in place after the programming
     period. Developments are not directly dependent on budget and EU resources of the
     given period. Developing organisations can also draw extra resources from the financial
     markets, what is more, after a while they can detach themselves completely from donor
     financing. Following a period of transition, programmes are integrated into the markets,
     thereby permanently expanding the economy.

     Running the programmes can also be achieved with a cheaper and much smaller
     governmental and background institutional apparatus. There will be less administration
     related to individual support. This will help to suppress the paternalist approach and to
     spread the concept of self-provision.



     5.2. Intervention areas

     On the basis of problems revealed in the situation analysis and the future vision outlined,
     factors can be identified in the case of which we find it possible and reasonable to exercise


                                                  64
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                              5.
state intervention, with a view to developing small and medium-sized enterprises.
The following table summarises interventions planned for the four major areas. (Planned
interventions are described in detail for each area in the Appendix.)



                                      intervention areas


        1. Regulatory                                                                 4. Entrepreneurial
                               2. Financing             3. Knowledge
        environment                                                                      infrastructure



     Tax and contribution                                                              Development of
                            Financing products           (Specialised)
      burdens on SMEs                                                                 business and R&D
                             tailored to SMEs          qualifications of
                                                      entrepreneurs and                 infrastructure
                                                       the labour force
        Administrative
          burdens
                             Direct, targeted                                          Development of ICT
                             capital support                                         infrastructure and use
                                                       Entrepreneurial
                                 to SMEs                 willingness
      Economic and legal
           safety

                            Liquidity, payment
                                  morals                                   Pillars

                                                                           Cornerstones




                                                 65
6.




                                          TARGETS



     6.1. Approach

     6.1.1. identification of targets

     When setting targets it was necessary to observe that the economic development of
     Hungary may only take place in a single structure if there is palpable improvement in the
     performance (income generation and employment) of the whole spectrum of small and
     medium-sized enterprises.

     The small and medium-sized enterprise development strategy affects several political
     fields, therefore the targets identified may be of different types. In case of certain targets
     specific numerical targets are provided (e.g. employment, income generation). The other
     group of targets may be expressed by several target values of different dimensions (e.g.
     development of business- or ICT-infrastructure); in these cases the joint change of several
     factors are considered the target. Finally, there are value-based targets where there is
     no possibility for numerical measurement (e.g. the strengthening of the willingness to
     enterprise); here the definition of the target status from a qualitative aspect is provided.


     6.1.2. identification of target values

     When designating the course of development value-based and target value-based target
     statuses have to be differentiated.

     Among targets to be presented in details on the succeeding pages, the following belong
     to the category of target value-based targets:
     • competitive share of public burden
     • decreasing administrative burdens caused by state regulation
     • strengthening of economic and legal security, fair competition
     • extending the range of higher financing risk products
     • increasing the accumulation of SMEs
     • development of business and R&D infrastructure



                                                   66
    Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                  6.
•   development of ICT infrastructure and use
•   expanding employment
•   increasing productivity
•   integration into global economy

The following belong to the category of value-based targets:
• improvement of SMEs’ liquidity
• extending knowledge of entrepreneurs and their staff
• development of entrepreneurial skill
• more efficient inter-company cooperation


The set of objectives for small and medium-sized enterprise development is illustrated
by the following summary chart (for the set of objectives broken down to specific targets
please refer to the Annex).




                                   Increasing SMEs’ economic performance




        Elaboration of a                                      Development of                   Development of
                                   Extension of
      supportive regulative                                   entrepreneurial                  entrepreneurial
                               financing resources
          environment                                           knowledge                       infrastructure



       Competitive share of                                                                    Development of
                                                              Extending the
         public burden         Extending the range                                            business and R&D
                                                              knowledge of
                                of higher financing                                             Infrastructure
                                                            entrepreneurs and
                                   risk products
                                                                employees
       Decreasing adminis-
         trative burdens                                                                   Development of ICT
       resulting from state                                                              infrastructure and use
                                   Increasing                Development of
            regulation
                                the accumulation           entrepreneurial skills
                                     of SMEs

                                                                                    Strategic target
          Strengthening
         of economic and         Improvement of                                     Pillars
        legal security, fair     SMEs’ Liquidity
            competition                                                             Cornerstone targets

                                                                                    Horizontal targets


                                            Increasing productivity
                                            Expanding employment
                                        Integration into global economy
                                   More efficient inter-company cooperation




                                                      67
6.                                            TARGETS




     6.2. Strategic Target

     Within our development strategy the main strategic target is increasing the economic
     performance of small and medium-sized enterprises.

     Regarding employment and income generation, until 2010 the Convergence Programme
     calculates with a slower growth than the national economic average in the public sphere
     and with a faster growth in the competitive sector.Our main strategic target is that the
     growth of the economic performance of small and medium-sized enterprises be in excess
     of the average growth of the competitive sector and in this way their proportion within
     the income generation of the competitive sector shall increase.



      measuring the realisation of objectives:
      •Under the sustainable growth of Hungarian economy the current ratio of gross
       added value (52% in 2005) produced by small and medium-sized enterprises shall
       reach 55% by 2013 and grow at a faster pace than that of the competition sphere.



     For each of the 4 main intervention areas of the strategy we have drawn up a comprehen-
     sive objective the realisation of which serves the purpose of reaching the highest level
     strategic target.


     6.3. Comprehensive Objectives (Pillars)

     6.3.1. elaboration of a Supportive regulative environment

     The operational environment of enterprises significantly influences the development and
     competitiveness of small and medium-sized enterprises: the volume of administrative
     burdens, the level of economic and legal security, the volume of public burdens
     concerning enterprises, enterprises’ access to information, and the features of the market
     competition. Therefore – in order to improve the competitiveness of enterprises – we have
     set the establishment of a regulative environment more supportive towards the operations
     of enterprises as our target.

     The broken down objectives of the objective ‘elaboration of a supportive regulative
     environment’ are the following:


     6.3.1.1. Competitive Share of Public Burden

     In the field of competitive share of public burden our aim is decreasing income centralisa-
     tion by considerably extending the circle of taxpayers, diminishing the ratio of tax evasion,
     and restructuring taxation. We aim at reducing the difference between the tax burden of
     SMEs and that of large corporations, along a decreasing volume of public burdens.


                                                  6
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                              6.

 measuring the realisation of objectives:
 • The ratio of GDP-proportional tax- and contribution revenues shall decrease, from
   3.1% – expected in 2007 – by 1.5 percentage points for 2013, taken into consideration
   the indicators of the neighbouring countries, as well. (The economy of SMEs is
   influenced by taxes and contributions imposed on them directly and by macro-
   economic level tax- and contribution burdens alike, therefore this indicator is used.)
 • Among factors hindering the economy of SMEs the intensity indicator of large tax-
   and social security burdens shall decrease from the 2007 data of 77 points to 65
   points by 2013 (based on the Ministry of Economy’s representative survey among
   entrepreneurs).



6.3.1.2. Decreasing Administrative Burdens Resulting From State Regulation

In order to decrease administrative burdens resulting from state regulation it is necessary
to significantly decrease administrative burdens relating to operations, to simplify the
criteria of market entrance, and to develop the regulatory environment of electronic
economy. In accordance with the Government Programme, we aim at halving the average
time needed for the administrative tasks of most frequent issues by spreading electronic
administration in a wide circle and omitting unnecessary bureaucratic rules.



 measuring the realisation of objectives:
 • In the field of business environment development the ratio of domestic administrative
   burdens shall reach the average level of EU-25 by 2013. (In Hungary it is 4.5% of the
   GDP currently; in the EU-25 it is on average 3.5% of the GDP.) Thus in the coming
   5 years a saving of HUF 100–150 billion will be available, which equals to a GDP-
   proportion of 0.6–0.9% annually.



6.3.1.3. Strengthening of Economic and Legal Security, Fair Competition

Reaching the target of strengthening economic and legal security, fair competition is
served by a number of specific targets: improving the quality of regulation, strengthening
the protection of property, especially that of intellectual property, assisting the spread
of alternative conciliation forms, strengthening the protection of creditors, cutting back
corruption, improving payment discipline. Furthermore it is worth mentioning here that
for domestic small and medium-sized enterprises it poses a considerable business risk
that vindication of their rights and demands is slow and the Hungarian jurisdiction can
not always guarantee their predictable functioning. Supplying economic players with
valid data is regarded an important public task of the state, as well. Our aim therefore is
to strengthen economic- and legal security and create fair competition.




                                             69
6.                                          TARGETS




      measuring the realisation of objectives:
      •Among factors hindering the economy of SMEs, the intensity indicator for the
       unpredictability of economic regulation shall drop from 63 points measured in 2007
       to 49 points by 2013 (based on the Ministry of Economy’s representative survey
       among entrepreneurs).



     6.3.2. extension of financing resources

     It is considerably hindering the growth of a certain ratio of small enterprises that the
     accumulation of their internal resources is not fast enough and they do not have access
     to external financing resources, for instance because banks do not grant them financing
     due to high transaction costs or insufficient guarantees, therefore small enterprises
     cannot exploit a part of growth opportunities. We set the target of proportional and
     sustainable extension of SMEs’ internal and external resources, serving the growth of
     income generation and employment.

     The broken down objectives of the objective ‘extension of financing resources’ are the
     following:


     6.3.2.1. Extending the Range of Higher Financing Risk Products

     The range of higher financing risk products covers the offer of diversified loan- and
     investment products available for SMEs, including investments in SMEs in their seed,
     start-up, and growth phases. Our aim is to achieve that in the monetary markets the
     range of products available for SMEs is extended, thus increasing the volume and ratio
     of the involvement of external resources.



      measuring the realisation of objectives:
      •By 2013 the ratio of small and medium-sized enterprises capable of involving
       external sources shall rise from 20% to 30% within the small- and medium–sized
       enterprise sector as a whole.



     6.3.2.2. Increasing the Accumulation of SMEs

     The growth of accumulation of SMEs, thus the increasing willingness to invest can be
     facilitated by the state decisively by regulatory instruments, promoting the growth of
     resources reinvested from the income of enterprises. It is our target that SMEs expend a
     larger ratio of their growing income upon accumulation.




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  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                               6.

  measuring the realisation of objectives:
 • Own resources for accumulation purposes are shown in the percentage of gross
   added value indicator – the value of which was 42.1% in 2005 in case of small and
   medium-sized enterprises – shall increase by 0.5 percentage points at a yearly
   average until 2013.



6.3.2.3. Improvement of SMEs’ Liquidity

For improving the liquidity of SMEs both the strengthening of the state’s payment discipline
and the dissemination of more efficient claim management processes are needed. It is our
objective that the liquidity of SMEs improves, thereby their growth faces fewer obstacles.



 measuring the realisation of objectives:
 • Numerical measuring is non applicable in this field, therefore we provide the
   definition of the target status by a qualitative aspect. In these cases the direction
   and content of changes are assessed by comparative, typically qualitative analyses,
   which are to be performed in respective specialised fields.



6.3.3. Development of entrepreneurial Knowledge

From the aspect of enterprises’ long term development entrepreneurial knowledge and
skills are of a decisive significance, therefore we aim at human resource development
both at management and employee level in the entrepreneurial sphere as a whole.

The broken down objectives of the objective ‘development of entrepreneurial knowledge’
are the following:


6.3.3.1. Extending the Knowledge of Entrepreneurs and Employees

 In the scope of developing entrepreneurial knowledge we set the continuous develop-
 ment of enterprise leaders and employees and the renewal of vocational education
– bearing in mind the demands of the economy – as our target.



  measuring the realisation of objectives:
 • The ratio of small and medium-sized enterprises the owners or employees of which
   participate in any kind of training shall rise from the 2007 data of 27.6% a year to
   35% by 2013 (based on the Ministry of Economy’s representative survey among
   entrepreneurs).




                                             71
6.                                            TARGETS




     6.3.3.2. Development of Entrepreneurial Skills

     The development of entrepreneurial skills and the willingness to enterprise, as a target, is
     playing an ever increasing role in the enterprise development policy of the EU, as well. In
     order to develop entrepreneurial skills it is necessary to disseminate knowledge essential
     for launching an enterprise, to develop an innovative, socially and environmentally
     conscious attitude, to supplement technical education with teaching business studies,
     and to better utilisation of the results of scientific research in the entrepreneurial sphere.



      measuring the realisation of objectives:
      •Numerical measuring is non applicable in this field, therefore we provide the
       definition of the target status by a qualitative aspect. In these cases the direction
       and content of changes are assessed by comparative, typically qualitative analyses,
       which are to be performed in respective specialised fields.



     6.3.4. Development of entrepreneurial infrastructure

     Low development level and rare network structure are typical features of the domestic en-
     trepreneurial infrastructure – especially in small settlements –, which have become serious
     encumbering factors in the development of small and medium-sized enterprises in certain
     regions. Therefore we aim at facilitating access to entrepreneurial infrastructure available
     for small and medium-sized enterprises and developing the linked service background.

     The broken down objectives of the objective ‘development of infrastructure’ are the
     following:


     6.3.4.1. Development of Business and R&D Infrastructure

     In order to improve business and R&D services it is necessary to expand the infrastructure
     of incubator houses and industrial parks, to develop integrated services (site+business
     services), to boost the capacity of R&D and technology transfer institutions, and to
     increase logistics capacities.



       measuring the realisation of objectives:
      • The ratio of SMEs purchasing management services shall rise from 76% to 5%
        by 2013 (based on the Ministry of Economy’s representative survey among entre-
        preneurs).
      • The settlement ratio of industrial parks shall rise from the 2005 data of 50% to 65%
        by 2013.




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 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                               6.

6.3.4.2. Development of ICT Infrastructure and Use

In the field of ICT infrastructure development the objective is to improve access to ICT
network infrastructure and broadband networks, and to increase the informatisation of
corporate and inter-company processes, furthermore the processes between companies
and the government.



  measuring the realisation of objectives:
 • e-Business index shall rise from the 2006 data of 56% to 70% by 2013 (in % of the
   index of the EU member state with the best results).
 • The 10% ratio (2006 data) of enterprises with more than 5 employees and having an
   integrated business management system shall reach 25%.




6.4. Horizontal Targets

Horizontal targets are valid in each of the 4 main intervention areas; measures planned
within the framework of the strategy indirectly contribute to reaching horizontal targets.


6.4.1. increasing productivity

The productivity of Hungarian small and medium-sized enterprises falls behind that of
the large corporations’ and only a small part of SMEs are capable of appearing in the
single market and third markets, furthermore just a fraction of them are able to actively
participate in the structural modernisation of the economy. This is an obvious fact but in
international comparison the difference between Hungarian small and large enterprises
seems to be quite big. The main reason for the productivity lag is the standard of technical
equipments and capital provision, which are low compared to large corporations. A part
of SMEs successfully link up with the sector of large corporations – dealing with export
and meeting domestic demands – and the remaining part are specialised in fulfilling
domestic, local needs. The obstacles of improving productivity are inadequate level of
corporate management knowledge and the fact that a considerable ratio of SMEs do not
provide their employees with proper training.

Therefore it is important to make the performance of knowledge intensive, higher added
value and cooperative activities attractive and accessible for a wide circle of small and
medium-sized enterprises in order to help their strengthening and catching-up with large
corporations that are more advanced as regards structural modernisation. Increasing
productivity by strengthening knowledge economy and innovation is the most important
step to be made for facilitating permanent growth.




                                             73
6.                                          TARGETS




      measuring the realisation of objectives:
      •Gross added value per employee – the amount of which was EUR 12,000 in the SME
       sector in 2005 – shall rise by a total of 30% to EUR 15,600 by 2013.



     6.4.2. expanding employment

     For the development and growth of small and medium-sized enterprises the possibility
     for increasing the number of staff employed by enterprises and improving the quality of
     labour force are to be facilitated. It makes the expansion of employment considerably
     difficult that in Hungary tax and contribution burdens related to employment are higher
     than the average, labour force offer adjusted to market demand is limited, participation
     in the labour market is low, and the ratio of inactive people is high. For this supply
     of labour force with an education background suiting the demand of enterprises must
     be ensured and in order to increase labour market activity the creation of more and
     better job opportunities has to be promoted, and the balance of labour market demand
     and supply has to be ensured. In order to improve the employment situation of dis-
     advantaged (permanently unemployed or lowly educated) people and people living in
     disadvantaged regions the establishment of small and medium-sized enterprises in
     disadvantaged small regions, as well as job creating investments of small and medium-
     sized enterprises operating in these regions must be supported.



      measuring the realisation of objectives:
      •While expanding employment the participation of small and medium-sized enterprises
       in employment shall preserve its current ratio (in 2005 the participation of SMEs’
       employees was near 69%), that is it shall grow at the same pace as the competition
       sphere does.



     6.4.3. integration into global economy

     For Hungarian enterprises having a growth potential to be successful in international
     competition and for high added value production and service activities to strike root in
     Hungary we wish to facilitate the integration of small and medium-sized enterprises into
     the global economy.



      measuring the realisation of objectives:
      •The export participation of small and medium-sized enterprises shall grow by at
       least 2 percentage points compared with the 2005 data of 35%.




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 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                            6.

6.4.4. more efficient inter-Company Cooperation

For small and medium-sized enterprises to be able to decrease their competitive disadvan-
tage against large corporations we wish to facilitate the cooperation (joint investments)
and networking activities among enterprises.



 measuring the realisation of objectives:
 •The ratio of enterprises participating in cooperation shall rise from 49.% (2007)
  to 60% by 2013 (based on the Ministry of Economy’s representative survey among
  entrepreneurs.




                                           75
7.




                                    INSTRUMENTS



     The following groups of instruments serve the achievement of the objectives set:
     • Measures aimed at the development of a supportive regulatory environment
       (measures to improve the business environment)
     • Fixed purpose state aids (tenders with EU and domestic resources)
     • State-supported financial instruments (financial schemes e.g. microcredit, guarantee,
       capital schemes, etc.

     One of the most important elements of small and medium-sized enterprise development
     policy is the improvement of the entrepreneurial environment the measure of which
     is the decrease rate of the direct and indirect transaction costs of enterprise activity,
     thus reforms aimed at meliorating the environment constitute a significant part of the
     enterprise development policy.

      As regards direct enterprise development instruments – supplementing the policy aimed at
      improving the business environment and incorporated into the 2007–2013 support budget
     – we are realising a change in direction, that means gradual but substantive restructuring
      of the development policy. For source allocation we use market-conform instruments to
      an ever growing extent and aspire to operate financially sustainable programmes. An
      important element of the system is that each of its players are directly motivated to reach
      the highest income generation surplus that will make the far more efficient utilisation of
      resources and reaching a significantly larger circle of entrepreneurs possible.

     When planning instrument groups we have to consider that a number of external and
     internal factors may change in the course of the 7 years of the programming period and
     these changes cannot be predicted precisely. During the planning phase the possibility
     to make necessary modifications and internal rearrangements has to be preserved.
     The following chart provides a summary of the government targets and instruments for
     small and medium-sized enterprise development.

     (Table: Instruments, Elaboration of a supportive regulative environment, Direct enterprise
     development instruments realised by public financing)


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    Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                  7.

7.1. Instruments Serving the Establishment of a Supportive Regulative
     Environment

SMEs’ development, ability to create job opportunities, and international competitiveness
depends on the environment determining the operations of enterprises to a large extent.
Business environment is influenced by several factors. The most important ones are the
magnitude of administrative burdens, the level of economic and legal security, enterpris-
es’ access to information, features of the market competition, and the volume of public
burdens concerning enterprises. In accordance with EU policies we have to make efforts
to establish a business environment facilitating the elaboration and introduction of envi-
ronmental technologies, as well as sustainable business management and operations.

The European Commission proposed for the Member States to decrease their adminis-
trative burdens by 25% for 2012, an act hopefully resulting in an average of 1.5% GDP
increase, investments and job creation. Therefore the development of the business and
enterprise environment is not only a basic socio–economic need but an EU expectation,
as well.

In October 2006 the Ministry of Economy and Transport – following consultations with
the corporate sector and in cooperation with other ministries – elaborated a short and
a medium term scheme and the linked action plan for the development of the business
environment and cutting the operational and transaction costs of enterprises. The business
environment development programme helps small and medium-sized enterprises in an
indirect way, its aim is to reduce the obstacles of enterprise operations resulting from
state administration, to depreciate enterprises’ expenditures and costs to a level that is
justified by social and market considerations, to contribute to the establishment of an
efficient, fast and simple procedure, and to strengthen the service provision feature of
state administration. As a result of a developed and rationalised business environment
enterprises can achieve significant savings – measurable even at national economic level.

We plan to reach the target with the help of the instruments presented below:


7.1.1. Simplified Company and tax administration

•   Simplification of administration related to company foundation, entrepreneurial activity
    launch, company restructuring, final settlement and liquidation, speeding up the procedure
    and making it more transparent, cutting transaction costs, setting a low barrier for market
    entrance, in the event of liquidation reinforced protection of the partner companies’
    rights, a more up-to-date regulation of the legal status and responsibility of sole pro-
    prietors, elaboration of a new legal provision on sole proprietors and one person firms;
•   Simplification of the system of taxes and contributions, cutting the number of payment
    obligations within the system of taxes and contributions (tax reform), increasing the
    stability of the tax system, merging tax and contribution declarations imposed on
    entrepreneurs;


                                               77
7.                                                                                                        INSTRUMENTS




                                                                                                               elaboration of a supportive regulative environment
                                                                                                                                                                            State
                                                                                                            Simplified                                        fair and
                                                                            instruments                                  economic and legal
                                                                                                            company                              accessible    trans-
                                                                                                                          security, favoura-                               micro-
                                                                                                             and tax                              business     parent
                                                                                                                         ble financial opera-                            financing
                                                                                                           administra-                          information   competi-
                                                                                                                          tional conditions
                                                                                                               tion                                             tion
                                                                   elaboration of a supportive regulative environment
                                                                   Competitive share of public burden          •
         Comprehensive objectives (pillars), cornerstone targets




                                                                   Decreasing administrative burdens
                                                                   resulting from state regulation             •
                                                                   Strengthening of economic and legal
                                                                   security, fair competition                                     •                              •
                                                                   extension of financing resources
                                                                   Extending the range of higher
                                                                   financing risk products                                                                                    •
                                                                   Increasing the accumulation of SMEs                                              •            •            •
                                                                   Improvement of SMEs’ liqudity                                  •                                           •
                                                                   Development of entrepreneurial knowledge
                                                                   Extending the knowledge of
                                                                   entrepreneurs and employees                                                      •
                                                                   Development of entrepreneurial skill        •                  •                 •
                                                                   Development of entrepreneurial infrastructure
                                                                   Development of business and R&D
                                                                   infrastructure
                                                                   Development of ICT infrastructure
                                                                   and use



     •                                        Simplification and acceleration of administration related to business activities; review
                                              of other regulations (accounting, etc.), raising the value limit for compulsory audit;
     •                                        Improving the quality of public administration processes, accelerating and simplifying
                                              licensing/authorisation procedures;
     •                                        Expanding electronic administration of issues concerning the tax authority, establishing
                                              the grounds of e-taxation and -contribution payment, facilitating the spread of
                                              e-invoicing;
     •                                        Simplification of administration related to tender schemes.


     7.1.2. economic and legal Security, favourable financial operational Conditions

     •                                        In order to settle legal disputes between enterprises the duration of court proceedings
                                              are to be shortened and opportunities provided by alternative conciliation forms are
                                              to be exploited;
     •                                        Modification of the Bankruptcy Act in a way that makes liquidation possible in a shorter
                                              period of time than the cur rent provisions do;
     •                                        Following the establishment of a ‘single window’ system for the provision of legal in-
                                              formation (a communiqué summarising the legal background of company foundation


                                                                                                                   7
            Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                           7.
            Direct enterprise development instruments realised by public financing
supported financing instruments                                  fixed purpose state supports

                                                    Business manage-                                       promotion of
 guarantee              Capital       investment      ment, training,         Business          iCt        engagement
instruments          investments       promotion    consultancy, infor-    infrastructure infrastructure   in innovative
                                                     mation provision                                        activities




   •                      •
                          •                •
   •

                                                             •
                                                             •                   •

                                           •                 •                   •                              •
                                                             •                                  •

              and pursuing activities) the promotion of the existing information system and the
              extension of Internet-based information services;
        •     Cutting back gridlocks in the field of public procurements;
        •     Terminating the practice of state and local governmental bodies’ overdue payments
              to enterprises.


        7.1.3. accessible Business information

        •     Provision of the widest possible spectrum of information helping the operations of
              enterprises via the Internet, establishment of a one stop shop information provisions
              system for entrepreneurs.


        7.1.4. fair and transparent Competition

        •     Publicity of companies, accessibility of corporate information;
        •     Increasing the efficiency of the control system for the sake of more efficient elimination
              of the underground economy (so-called “whitening” of the economy);




                                                                 79
7.                                          INSTRUMENTS




     •    Review of the institutional network and functioning of market surveillance, strengthening
          market surveillance coordination;
     •    Acting against underground economy; Increasing the efficiency of the control system
          for the sake of more efficient elimination of the underground economy (so-called
         “whitening” of the economy);
     •    Laying the foundations of a more predictable tax and contribution payment environ-
          ment.

     In the framework of the programme as of 2007 the realisation of modifications of
     legal provisions and of development policy measures taking into consideration equal
     opportunity aspects, as well, is to be initiated. It will have a tangible effect on both the
     competitiveness of entrepreneurs and the central budget alike and will result in a cost
     saving the volume of which can be expressed in the percentage of GDP in the coming
     period. Generation and realisation of regulative and development projects aimed at
     improving the business environment will be repeated on a yearly basis, with a regard
     to their effect on competitiveness and budget, and the time needed for implementation.



     7.2. Instruments for the Expansion of Financing Resources

     In accordance with principles presented earlier, we forward excess resources to companies
     via a mediating network governed by the market. Our expectations are that in a few years’
     time these networks integrate into the monetary market and become subsystems that are
     capable of independent functioning and do not need further financing from donors to
     keep on operating.

     The main objective of the programmes is easing micro-, small-, and medium-sized
     enterprises’ access to financing resources. Interventions shall be aimed at market
     shortfalls, which are to be revealed by specific analyses.

     We plan to carry out the exploitation of resources via a 2-step institutional system.
     Resources will be placed in a financing fund providing resources for financial mediators.
     Financial mediators are independent business organisations with a financial responsibility,
     financing developments from the resources of development funds. Their activity must
     be sustainable to an ever growing extent and they are to establish a risk management
     capacity that helps them involving further monetary market resources into the financing
     of small and medium-sized enterprises.

     Enterprises funded by financial mediators would be typically the following:
     • Financing of enterprises that are not financed by commercial banks due to reasons of
       economy of scale but having a growth potential and being in a need for a small initial
       loan (microcrediting).
     • Enterprises lacking of sufficient tangible collateral and enterprises which are specifically
       risky due to their small size (typically the possible clients of commercial banks).


                                                    0
    Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                 7.
•   Among possible target companies of off-board capital investments companies that
    are not financed by the classic capital market due to reasons of economy of scale.
•   Capital and loan financing of enterprises that operate in high regional risk areas but are
    potentially capable of growth.

When selecting enterprises to be developed and funded the chances for improving income
generation play a decisive role, sectoral preferences are subordinated to it.


7.2.1. microfinancing

In the scope of microfinancing microcredits shall fund enterprises which are creditworthy
but are not bankable, that is enterprises that cannot be granted commercial bank funds
due to cost circumstances resulting from the current financial regulation and due to their
small volume of initial credit requirement. By developing microcrediting techniques and
modifying operational regulations the following changes are to be implemented: credit
rating periods shall be significantly shortened; the number of clients granted financing
shall be multiplied, introduction of graduated crediting for the efficient management
of risks; financing organisations should grant loans that are adjusted to the business
cycle of enterprises, the financial accountability of microcrediting organisations shall be
strengthened; operational, and later financial sustainability, thus within 4–5 years the
possibility for the involvement of non-supported resources shall be established.

In order to achieve the sustainability of microcrediting it is necessary to utilise risk
management methods that take international practice into consideration and suit
domestic possibilities and the special features of clientele, hereby making the realisation
of microfinancing feasible in a cost efficient way. Asset-based financing and factoring
may have a role in microfinancing, too, under principles applicable for loaning.


7.2.2. guarantee instruments

The use of guarantee instruments increases small and medium-sized enterprises’ chances
for access to loan. A growth volume exceeding the expansion of the loan market seems
to be reasonable, beyond widening the range of current services. The elaboration and
utilisation of instruments enabling more efficient management of collaterals and loan
risks are justified. The efficiency of the guarantee activity can be improved by reviewing
the functions of the current organisational circle and modifying the share of tasks.


7.2.3. Capital investments

The modification of the Capital Market Act – passed in the autumn of 2005 – provides
new opportunities for the advancement of capital investments with state instruments. In
capital investment funds the combination of private capital and capital originating from
state resources can be realised. This – on the one hand – makes it possible for the “holding
fund” function to gradually take over the role of directly investing state-owned capital


                                               1
7.                                        INSTRUMENTS




     associations and contribute to the achievement of economic policy targets through capital
     investment funds. On the other hand it makes the principle of “market investor” applicable
     to a much larger extent, based on which capital granted under the same conditions from
     a state fund does not qualify as support.

     The frameworks of the programme enable the launch of further financial schemes in
     the 2007–2013 period, and if necessary, the regrouping of appropriated amounts among
     different schemes.


     7.2.4. investment promotion

     In the course of enterprises’ life there are obstacles the bringing down of which causes
     difficulties for most of the enterprises under current market conditions. These market
     inadequacies hinder primarily the realisation of investments essential to the growth of
     micro and small enterprises struggling with capital shortage, the establishment of a
     formalised structure and further greatening of companies overgrowing the phase of
     being directly managed by the owner(s), the development of enterprises’ independent
     R&D activity, and parallel with that, enterprises’ entering the international market.

     One of the most important tools easing the market inadequacy listed in the first place
     is direct investment support granted to micro and small enterprises (besides facilitating
     access to funds via the tax system and to microfinancing). The second group requires
     the implementation of different kinds of developments, even complex ones, which are
     not negligible since these enterprises represent a significantly larger weight in local
     employment – especially in smaller settlements – than the added value produced by
     them. For the extension of their scope of activities the renewal of the technology used
     may be necessary, chiefly by adaptive innovation.

     Initially the absolute amount of supports is growing but they play an ever decreasing
     role among development instruments and aim at reaching specific economic policy
     targets in the first place. Supports will typically fund the initial stage of the innovation
     process, strengthening of innovative small and medium-sized enterprises, improvement
     of their technological preparedness and R&D capacities, furthermore investments and
     developments (introduction of quality and environment management systems, spreading
     the use of ICT tools and applications), seeking to improve competitiveness and boosting
     employment, especially in least developed areas.



     7.3. Instruments for the Improvement of Entrepreneurial Knowledge

     The competitiveness of small and medium-sized enterprises is greatly influenced by the
     extent to which they exploit opportunities provided by informatics tools and corporate
     management systems, if have access to information essential to successful operation,
     the standard of public services, and the type of human resource development services


                                                  2
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                 7.
 (education, training, consultancy) they are able to utilise, since compared to large
 enterprises they are less able to build up such capacities. In line with the European Charter
 for Small Enterprises and the recommendations of the Commission communiqué titled
“Modern SME Policy for Growth and Employment” our intention is that education, training,
 and information provision of enterprises will have a key role in enterprise development.

 International experience reveals that education within the frameworks of the school system
 is crucial for long term development. Education modules developing entrepreneurial
 skill have to be incorporated into the curriculum of elementary, secondary, and tertiary
 educational institutions. It is necessary to evolve the curricula of secondary schools
– currently tailored to domestic needs – and link them up with the renewal of vocational
 education. In addition, regular further education of tutors is essential, as well. In higher
 education both the qualitative and the quantitative aspects of teaching practical business
 information are to be evolved and technical education is to be more strongly linked to
 targeted teaching of business information than it is today.

These education programmes would consist of practical business knowledge, informa-
tion on initial administrative costs and operative tasks of enterprise launch, on market
opportunities and risks, the operations of enterprises (taxation, accounting, data provision
and employment issues), and elementary knowledge of entrepreneurial management,
furthermore the programmes would make the acquisition of basic legal knowledge (for
instance information necessary to judge the appropriateness of the contents of simplified
entrepreneurial and other contracts) possible, as well.

Compared with start-up enterprises, businesses already in the market and wising to
develop and evolve have to meet the challenges in other market sectors. Enterprises
must be aware of administrative obligations, employment and competition regulations,
environmental rules, market regulation. They have a reason to expect the assistance of
the government in acquiring these pieces of information. In case of start-up ventures it is
essential to elaborate and implement education, training and information programmes
of a higher standard and wider spectrum for the sake of all this.

The training and education demand of enterprises already in the market is on the one
hand limited, and on the other hand targeted. Enterprise development can have a role
in acquiring information on the specific course of business primarily. It is necessary to
progress the issue of organisations providing information for small enterprises; they
should be more motivated to satisfy the real needs of enterprises. This can be achieved in
a way that training and consultancy are linked up with financing on the level of individual
enterprises, that is if the main aim of technical assistance is helping the utilisation of
excess resources and reimbursement of loans.

A basic prerequisite of enterprises’ successful operation is access to information and the
ability to utilise information efficiently. Tight connection between educational/training
systems and information provision increases the chances of efficient information


                                              3
7.                                        INSTRUMENTS




     utilisation. Within the field of information provision for entrepreneurs there are 2 tasks
     to be done. On the one hand, pieces of information of interest for enterprises and
     directly linked to their operations have to be made accessible. This basically is a central
     task and can be solved chiefly by Internet-based content provision. On the other hand,
     entrepreneurs have to be offered help with the information to reach them. This is the duty
     of enterprise development organisations, which are in direct contact with enterprises.
     Efforts have to be made for augmenting the role of single window services, thus cutting
     the information costs of enterprises.



     7.4. Instruments for the Improvement of Entrepreneurial Infrastructure

     7.4.1. Business infrastructure

     Infrastructure is of prime necessity for the subsistence and development of enterprises.
     Low development level and loose network structure are typical features of the domestic
     entrepreneurial infrastructure – especially in small settlements –, which have become
     serious encumbering factors in the development of small and medium-sized enterprises
     in certain regions.

     The development of the physical and service provision background of small and medium-
     sized enterprises focuses on problems that are not solved by the markets or are solved in
     a way that is not efficient enough. When developing integrated services (site + business
     services) we fundamentally take account of the efficiency criteria.

     By developing intermodal and regional logistics centres domestic enterprises can
     access logistics services for a smaller price; a fact that can boost their competitiveness
     significantly.

     In the course of promoting companies’ focus on their core activities and attracting
     foreign investments the establishment level of logistics infrastructure, accessibility of
     high standard, complex logistics services have a significant role; making it necessary to
     strengthen the development of the logistics sector and to extend the range and improve
     the quality of services (including ICT services, as well) offered by logistics centres
     (especially intermodal and regional logistics centres). Investments aiming at improving
     the standard of logistics service provision directly support SMEs’ supply and distribution
     activities, thereby facilitating their competitive operations.

     In order to raise the competitive service standard of industrial parks and industrial areas
     it is crucial to widen the range and improve the quality of services promoting production
     and operation – including the development of innovative activities and technologies within
     the industrial park – for the competitiveness of businesses settled down in industrial
     parks and that of small and medium-sized enterprises functioning in the vicinity to be
     boosted efficiently and effectively.


                                                  4
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                  7.
 It is necessary to develop the core infrastructure and services of existing industrial parks
 so that industrial parks of local – regional significance can evolve into parks that are
 able to provide for the economic development duties of the small region; and parks the
 professional and service provision activities of which reach beyond the physical limit of
 the industrial park itself are able to trigger off an economic development effect at regional
– or even national – level. Practically this is connected to incubator house development alike,
 on the one hand by establishing new incubators primarily in industrial parks and centres
 of small regions, on the other hand by the ‘innovation-oriented’ development of existing
 entrepreneurial incubators, introduction of innovative and technological services.


7.4.2. iCt infrastructure

In order to boost the competitiveness of SMEs it is necessary to support the establishment
of an up-to-date ICT network infrastructure, to promote access to broadband networks,
especially in retarded and disadvantaged territories.

For developing the ICT infrastructure – connected to boosting the competitiveness of
SMEs – it is indispensable to establish an up-to-date ICT network infrastructure via
facilitating access to broadband networks. Target areas of development: small rural
settlements in a disadvantaged situation and economically falling behind; their catching-
up; increasing their competitiveness by granting access to broadband infrastructure.

In order to be cost-effective it is practical to promote interactive, open-source ICT
solutions guaranteeing up-to-date, integrated access and interoperability. In the course
of developments the strengthening of information security (data and network security)
has to be focused on, thereby confidence in informatics systems and networks can be
boosted. For avoiding monopolies – thus for the sake of price reductions – the appearance
of alternative service providers and services, that is competition between various
broadband technologies has to be encouraged by development policy tools, as well, in
addition to market regulation.

For strengthening entrepreneurial culture and increasing the efficiency of corporate
process management it is indispensable to establish corporate management (management
decision support and information, supply, and customer contact) systems that facilitate
inter-company business relations, the efficiency of internal corporate processes, improve-
ment of network security and service quality, effective knowledge management, and
to introduce quality-, environment-, and other management systems. While aiming at
spreading the use of an up-to-date, electronic, integrated, real time, and expanded corporate
operational model, raising the level of IT penetration of the company can be achieved
by supporting complex corporate infocommunication developments, among others by
facilitating the spread of applications and intelligent business solutions intensifying the
exploitation of the opportunities provided by virtual space, while promoting consumer
electronic commerce and IT penetration of inter-company business relations.




                                               5
7.                                       INSTRUMENTS




     7.4.3. promoting the pursuance of innovative activities

     Supports mean to boost the R&D and innovative activities of domestic companies,
     facilitating better utilisation of existing capacities and results, promoting the domestic
     and international cooperation between the players of the R&D&I process, and reducing
     the regional disproportionalities of R&D&I activity.

      For knowledge to be utilised in the best possible way in the market supporting R&D
      projects that are mainly of business purpose and have a higher risk of return has an
      outstanding significance; especially that of promoting applied research and experimental
      development carried out by the cooperation of universities and research institutions,
      in which enterprises play a leading role, and passing over the results to the market. In
      order to this the target is supporting primarily those cooperative research projects that
     – founding on the outcomes of research – lead to the creation of cutting-edge marketable
      products, processes and services representing high value.

     The development of an independent corporate R&D&I capacity and the promotion of
     the innovative activity of technology intensive enterprises contributes significantly
     and directly to the improvement of the competitiveness and growth potential of the
     corporate sector. We set the following objectives: promoting enterprises’ independent
     or cooperative product, service, and technology development (and the purchase and
     adaptation of competitive technologies), the utilisation of new or improved products,
     their launch in the market, and supporting the related brand building.

     For driving a knowledge-intensive, innovative activity of international significance inno-
     vation clusters, technological platforms, and innovation and technology parks (“science
     parks”) will be established, principally on the bases of existing R&D&I cooperation
     activities and service provision infrastructures (of universities and industrial parks).



     7.5. Enterprise Development Instruments Aiming at the Realisation of
          Horizontal Objectives

     7.5.1. Direct Job Creation

     One of the main objectives of the strategy for small and medium-sized enterprise
     development is the facilitation of economic growth, thereby increasing demand for labour
     force, creating new job opportunities, and contributing to the creation of a situation
     where there is a human resource of proper quality available for filling workplaces. For
     the successful implementation of employment activity intensification, human resource
     development, and the institutional reforms necessary to that we wish to operate various
     programmes. Within improving the operational frameworks of small and medium-sized
     enterprises special attention must be paid to simplifying the process of employing the
     first jobholder.


                                                 6
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                 7.

7.5.2. promoting appearance in external markets

The medium term foreign economic strategy of the Hungarian Government, adopted in
2005 and still in effect, has pointed out that in order to keep the Hungarian economy on
the path of investment- and export-driven growth it is necessary to speed up the pace
of foreign direct capital influx, have up-to-date export promotion tools, and sectoral and
relational policies in place. The operative implementer of the foreign economic strategy
is ITDH Hungarian Investment and Trade Development Agency, functioning as one of the
background institutions of the Ministry of Economy and Transport. The target market of
ITDH’s business and trade development activity is the domestic SME sector in the first
place since this is a company segment that is basically underfunded and does not have
its own body or agent network in charge of external markets, however, it is capable of
manufacturing products which are competitive in the international market alike, and
should it invest in foreign countries in the course of its development, new resources
might be activated. Small and medium-sized enterprises’ involvement in exports and
foreign direct capital investments can be increased by state trade development and
investment promotion instruments, since SMEs – based on their role in other fields of
the economy – can be made eligible for increasing their role in export, thus their effect
on the general growth and competitiveness of economy can be positive, as well.

Enterprises following an export expansion strategy expect to be granted central,
institutional assistance for the realisation of their objectives, among others for identifying
export opportunities, searching and mediating business partners, supporting marketing
work, and accessing information on external markets. ITDH provides these enterprises
with information, programmes, social capital, consultancy, and in certain cases non-
refundable financial support granted by means of applications, used for participating
in exhibitions and business meetings, furthermore besides its supplier support activity
ITDH implements programmes helping the capital allocation activity of Hungarian
companies.

For expanding export of products and services – which is an element of the external
economic strategy –, in accordance with effective international obligations, the
introduction of the Hungarian Export-Import Bank Ltd’s and Hungarian Export Credit
Insurance Ltd’s products has to be made possible, by the help of which enterprises
can preserve or improve their competitiveness compared to the European Union’s
institutions having a similar profile.

The efficient use of the instruments of economic diplomacy plays an important role in
the success of SMEs in foreign markets, as well. By using these instruments the state can
effectively contribute to SMEs’ integration into regional–global economy and drawing
its benefits.




                                              7
7.                                        INSTRUMENTS




     7.6. The Connection and Synergy of Programme Elements

     In a few key areas synergic effects can be produced by connecting certain programme
     elements. In the most important areas we envisage the following synergic effects:

     Microcredit Programme. Entrepreneurs with no experience in the utilisation of external
     resources are granted the credit and provided with the consultancy simultaneously. We
     improve the risk management capacity of microfinancing organisations by training. In
     incubator houses, industrial parks, logistics centres, and sites that have not been granted
     the “Industrial Park” title services can be combined with infrastructure alike.

     Supporting the Innovation Process. Incubation services, site and capital, and credit
     financing for the market introduction of innovation. Innovation incubators try to solve
     the problems of certain stages of the innovation process by selecting enterprises at the
     same time.

     Direct supports serve purposes that are closely connected to other programme elements,
     and their utilisation is linked to financing, training, educational, information, and infra-
     structure development measures.



     7.7. Small and Medium-Sized Enterprise Development Instruments by Size
          of Enterprise

     In the following table instrument groups and programme elements are categorised by the
     size of enterprises, taken into consideration that there is not always a clear-cut division
     line between groups.




                                                  
Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                 7.
matrix Summarising Small and medium-Sized enterprise Development instruments by Size of enterprise
instrument groups/
                                         micro                       Small                   medium
programme elements
                                Development of the business environment, improvement of enterprises’
                                operational conditions. Cutting the operational costs of enterprises,
Establishment of a supportive   mitigating the obstacles of economy. (Simplification of company
regulatory environment          and tax administration, increasing the legal security of enterprises,
                                improving financial operational conditions, guaranteeing the fairness and
                                transparency of competition.)
instruments operated by public financing
fixed purpose state supports
Individual support,             Linked to specific horizontal economic policy objectives (innovation,
applications (promotion of      research&development, increasing employment, promoting investments,
investments, engagement in      catching-up of disadvantaged small regions) by simpler and transparent
innovative activities)          processes.
                                                            Industrial parks. Logistics centres.
                                                            Utilisation of the services of research and
Business and ICT                Incubators for start-up
                                                            development capacities. Strengthening the
infrastructure                  ventures.
                                                            relations between knowledge centres and
                                                            enterprises.
                                                                                      Development of corpo-
                                Promoting the utilisation of corporate
                                                                                      rate process manage-
                                management services. Development of
Informatisation of corporate                                                          ment and e-commerce.
                                e-commerce. Economic and technical services
processes                                                                             Mastering management
                                utilised mutually (network formation including
                                                                                      knowledge essential to
                                the development of clusters).
                                                                                      becoming a supplier.
                                                            Supporting decisions
                                Training and consultan-     regarding the market      Facilitating the appear-
                                cy tailored to individual   introduction of innova-   ance and presence in
Education, training,            needs, linked to micro      tion processes. Sector-   foreign markets by sup-
consultancy, information        financing. Promotion        specific consultancy,     porting the participa-
                                of the initial phase of     promotion of the ex-      tion in fairs; market
                                innovation; mentoring.      change of best foreign    information, advice.
                                                            experiences.
State supported financing instruments
Credit programmes               Microfinancing.             Rate guarantee for commercial bank credits.
                                Guaranteeing the port-
                                                            Guaranteeing commercial bank credits of
Credit guarantee                folio of microcrediting
                                                            enterprises with a limited collateral.
                                organisations.
                                Seed capital by
                                                            Investment via co-financing by private investors,
Capital programmes              involving private
                                                            mostly in the early stage.
                                investors.




                                                     9
8.




                                FINANCIAL PLAN




     In the current financial chapter financial plans are presented the logic of which differs –
     as a result of the different nature of the areas to be developed – and which are partly the
     means of accessing surplus external resources (financing, knowledge, entrepreneurial
     infrastructure development), and partly lead to cost saving (improvement of regulatory
     environment) for enterprises. Resources predominantly granted by the European Union
     and to be expended upon major instruments serving the development of small and
     medium-sized enterprises and resources becoming available for enterprises with the
     help of this are summarised in a table format.




                                                 90
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                              8.
the division of the main groups of instruments serving the development of small and medium-sized
enterprises, by external resources accessible for enterprises, 2007–2013
                               resources planned      Division by       Cost saving and        Division by
                   type of       to be utilised        resources       excess resources         available
 Denomination
                   support         (2007–2013)       planned to be    available for enter-       excess
                                  (billion huf)       utilised (%)    prises (billion huf)*   resources (%)
Regulatory
                      GI              115.43                9.67              75.00              29.70
environment
 Financing                            453.64               3.01            1,446.5              49.11
  of which
  Supporting
                     NRS              242.00               20.27              242.00               8.21
  investments
  Microfinancing      RS               85.53                7.16              342.12              11.61
  Guarantee           RS               76.28                6.39              762.80              25.89
  Capital             RS               49.83                4.17               99.66               3.38
 Knowledge           NRS              252.53               21.16              252.53               .57
 Entrepreneurial
                     NRS              371.77               31.16              371.77              12.62
 infrastructure
total                               1,193.33              100.00            2,945.88             100.00
 NRS= non-refundable support, RS= refundable support, GI= governmental investment
* In order to establish an enterprise-friendly regulatory environment we aim at reducing the administrative
  burdens of enterprises. HUF 75 billion indicated in the “Regulatory environment” row of the table stands
  for cost saving expected in case targets of “In Tune with Business” Programme are met.
 Sums related to financing, knowledge, entrepreneurial infrastructure indicate excess resources available
 for enterprises in the framework of development instruments promoted by domestic resources or the
 co-financing of the European Union.




8.1. Financing the Establishment of a Supportive Regulatory Environment

In order to establish a supportive regulatory environment, in the scope of “In Tune with
Business” Programme the implementation of modifications of legal provisions and
development policy measures that will have a tangible effect on both the competitiveness
of entrepreneurs and the central budget in the coming period was started in the year
2007. Appropriation under the Heading “Business Environment Development” serves
the implementation of the above, enabling the completion of surveys and impact studies
in intervention areas specified in the programme, the establishment and operation of
information portals and spots aiding enterprises, and funding trainings. Nearly half
of the HUF 250 million sum available in the year 2007 provides an opportunity for the
completion of research, studies, and surveys. In addition to that, 2007 measures involve
website development, consultancy provided by experts or ad hoc experts, organisation
of seminars and field trips. To mark the closure of the programme for this year, an
assessment document will be prepared.

Funding for the establishment of a supportive regulatory environment comprises
resources of the Electronic Public Administration Operational Programme (EAOP) – co-
financed by the European Union and announced in the framework of the New Hungary


                                                     91
8.                                      FINANCIAL PLAN




     Development Plan (NHDP) – and State Reform Operational Programme (SROP), beyond
     the appropriation under the Heading ’Business Environment Development’.

     ASOP’s support schemes concerned:
     • within EU 27, the Simplification of Administrative Processes
     • and Deregulation.


     EAOP’s support schemes concerned:
     • electronisation of the administrative processes of the Registry Court
     • advancement and updating of Registry Court and company information systems
     • updating of taxation accounts
     • realisation of taxpayer-focused data provision model
     • Tax Authority Project for Updating Audit Informatics
     • establishment of a Central Management System
     • Budget Management System
     • elecronisation of admin’ procedures at the document handling offices
     • electronisation of customs formalities
     • establishment of a one stop shop administration in Hungary related to customs
       procedures and product movement
     • supporting preparatory activities for widening the scope of electronic processing
     • implementation of electronic payment
     • central electronic payment solution
     • infrastructural development of the central system (client gate)
     • extension of the Central Electronic Service Provision System and implementation of
       public service provisioning with public utilities and development of their services.

     However, a part of the measures may be implemented without the utilisation of financial
     resources; by consistently enforcing the competitiveness considerations incorporated
     into the process of codification.

     In SROP and EAOP the envisaged numbers of financial planning are not available for
     measures relating to small and medium-sized enterprises specifically, therefore in the
     financial table resources available within the framework of Operational Programme
     priorities as a whole, aiming at improving the regulatory environment are indicated.



     8.2. Funding the Expansion of Financial Resources

      Preferential, refundable financial schemes and non-refundable application schemes both
      aim at improving small and medium-sized enterprises’ access to financing resources.
      Resources for the promotion of the schemes are available in the framework of the Economic
      Development Operational Programme – incorporating European Union resources as well
     –, Central Hungary Operational Programme, and the Small and Medium-Sized Enterprise
      Budget Appropriation, funded by domestic resources exclusively.


                                                 92
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                8.
Due to the large volume of source reallocation for refundable financing programmes the
majority of external resources available for enterprises will be provided by preferential
financial schemes. In the scope of financial programmes microcredits, guarantee
instruments, and capital programmes will be promoted.

Microfinancing:
The HUF 5 billion appropriated for microcrediting is partly for refinancing, partly
for guarantees. In this case, due to partial direct refinancing and a larger number of
guarantees, calculating with a 4-fould leverage only, it will be feasible to allocate
credit worth HUF 342 billion.

Guarantee instrument:
In the case of guarantee instruments enabling the medium term financing of small and
medium-sized enterprises by providing access to commercial bank loans, we calculate
with a 10-fold leverage, since the resources of the net guarantee called will make a 10-
fold capital leverage possible. That is a unit of source will make the allocation of 10 units
of credit possible. Thus HUF 76 billion reserved for guarantee programmes will make the
allocation of HUF 762 billion worth of credit possible in 7 years.

Capital programme:
Nearly HUF 50 billion designated for the capital programme involves a further HUF 50
billion worth of private investment resources, that is external resources amounting to
approximately HUF 100 billion can be granted to small and medium-sized enterprises.



8.3. Funding Entrepreneurial Knowledge Development

Resources for the development of entrepreneurial knowledge are provided for by the
corporate management (corporate process management; quality and other management
systems; e-commerce) and training-consultancy (business, market development
consultancy; consultancy related to financial programmes) measures of the Economic
Development Operational Programme – including European Union resources as well – and
that of Central Hungary Operational Programme, the consultancy (business consultancy)
measures of individual Regional Operational Programmes, and the training (workplace
training) measures of the Social Renewal Operational Programme relating to enterprises.

In the scope of Social Renewal Operational Programme the knowledge development
priority of the Operational Programme – beyond measures assisting the training of small
and medium-sized enterprises – includes measures for supporting the training of the
population, as well, since these trainings contribute to the development of small and
medium-sized enterprises’ and their employees’ knowledge base.




                                             93
8.                                     FINANCIAL PLAN




     8.4. Funding Entrepreneurial Infrastructure Development

     Infrastructure development is funded by the research & development measures of the
     Economic Development Operational Programme and Central Hungary Operational Pro-
     gramme, furthermore by the resources – co-financed by the EU – of ICT development
     schemes and that of measures aimed at developing the broadband network infrastruc-
     ture and logistics services, and by the available resources of the Research and Technol-
     ogy Innovation Fund (domestic innovation, international cooperation).




                                                94
                                                                                               9.




     IMPLEMENTATION AND MONITORING



9.1. Implementation

A comprehensive draft of measures or action plan for the integrated small and medium-
sized enterprise strategy will not be elaborated, because the specific subdivisions of the
strategy have their separate, approved measure/action plans which differ in nature and
touch on the specific subdivision. Thus these adopted measure/action plans constitute
a joint basis for the implementation of the integrated strategy.

The state participates in the direct allocation of resources at an ever descending rate,
its role is limited to regulation and supervision. Programmes’ operation efficiency is
determined by the interest of executive organisations primarily, administrative control
plays a secondary role. The majority of specific decisions related to resource allocation is
transmitted to lower levels, to executive organisations, together with the corresponding
responsibility.


9.1.1. implementation of measures relating to the establishment of a Supportive
       regulatory environment

Ministries and authorities concerned participate in the implementation process in
cooperation. The execution of measures is performed in the system of responsibilities
adopted by the Government, during which responsibilities resulting from sharing the
governmental workload may not be violated.

The operational organisation for the establishment of a supportive regulatory environ-
ment is planned to be structured in the following way (presenting the example of “In
Tune with Business” Programme of the Ministry of Economy and Transport):




                                             95
9.                                          IMPLEMENTATION AND MONITORING




                  organisational model for the execution of regulatory-type measures


                                                                      Sponsor Board

         MoE T – In Tune with Business Programme

         MoE T – State Secretariat for Economic Development          Other ministries



             Project Sponsor                                                  Sponsor2     Sponsor3   Sponsor… n




                  Project
                  Director                            Further project participants


                                            Representatives
                  Project                       of other
                                                                         Representatives
                  Manager                    Departments
                                                                             of other
                                                  and
                                                                           Ministries
                                             Organizations
                                               of MoE T
                   Project
                 Coordination
                    Group



                    Project                      Project
                   Working                      Working
                    Group                        Group
                   managers                     managers


                      Project                       Project
                     Working                       Working
                       Group                        Group
                     members                       members



                 Project tasks                Project tasks
                  executives                   executives




     For the establishment of the supportive regulatory environment a specific project will be
     elaborated the highest level operative leaders of which (state secretaries of ministries
     and general directors of bureaus concerned the most) constitute a Sponsor Board.
     The Sponsor Board ensures efficient “inter-institutional” working cooperation, brings
     necessary strategic decisions, and within their respective member institution, members
     guarantee the implementation of project tasks. The secretarial duties of the Board are
     administered by the Ministry of Economy and Transport.

     The Project Director – within the sphere of competence bestowed upon them by the
     Project Sponsor – has full responsibility and competence within the specific ministry in
     the implementation of the project. The Project Manager appointed by the Project Director


                                                                               96
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                                   9.
manages and coordinates the operative implementation of the project. In the provision
of coordination duties his/her job is assisted by the Project Coordination Group managed
by the Project Coordinator. Experience proved that the organisational and operational
system of the project is to be reviewed whenever necessary.

The advancement of the establishment of a supportive regulatory environment is
supervised by the Sponsor Board on an approximately quarterly basis. In the course of
supervision reports are compiled on the progress of subprojects, the advancement of
the programme against the schedule is checked, moreover the eligibility of the standard
of task provision is reviewed. A regular report is drawn up for the Government, as well,
on the progress of the programme.

Content definition of the individual subprojects is specified in the so-called core
documents. Upon the closure of subprojects a subproject final document is compiled,
which includes – beyond assessing productivity – the settlement of the subproject’s
costs, a comprehensive rating of the subproject’s activity, and the identification of
experiences to be utilised in the future. Following quality assurance the final document
is to be signed off by the Project Manager and the Project Director.


9.1.2. realisation of the extension of financing resources

In the framework of financial programmes it is preferential investment and operating
loans; in order to facilitate enterprises’ access to loan it is guarantee and insurance we
want to offer; and for accessing capital we want to make capital investment programmes
available for enterprises.

Financial programmes are financed by a holding fund.17 The fund contributes to the
functioning of financial programmes in several forms, which differ in the case of each
instrument group. The holding fund is managed by the Hungarian Enterprise Financing
Limited Private Company.

Its key activities are: granting credit limit for financing organisations, and – to a smaller
extent – co-financing of venture capital funds, undertaking individual and portfolio
guarantees, provision of technical assistance. The fund utilises the instrument of gradual
financing and contributes to the extension of the resources of profitable organisations
only. The managing entity of the holding fund typically does not have contact with
enterprises, it implements the programmes by the involvement of financial mediators.




17 Under holding fund and holding fund managing entity the holding fund function specified in Section 4, Article 44 of Council
   Regulation (EC) No. 1083/2006 laying down general provisions on the European Regional Development Fund, the European
   Social Fund and the Cohesion Fund, furthermore the holding fund function specified in Section 8, Article 43(2) and Article 44
   of Commission Regulation (EC) No. 1828/2006 setting out rules for the implementation of Regulation (EC) No. 1080/2006 of the
   European Parliament and of the Council on the European Regional Development fund and the abovementioned Regulation are
   meant, and not a legal form.




                                                               97
9.                                 IMPLEMENTATION AND MONITORING




             organisational scheme for the implementation of financial programmes



           Donor level                                   Donor (EC Hungarian Budget)


                                                               Managing Authority




                                                € HUF
           National or regional level
                                           Holding Fund Manager activity                           Holding Fund activity



                                                € HUF




                                                                           € HUF

                                                                                   € HUF

                                                                                           € HUF
                                           Financial mediators
           Private sector




                                                                           € HUF

                                                                                   € HUF

                                                                                           € HUF
                                                        SMEs




     The managing entity of the holding fund selects financial mediators participating in the
     programme in the framework of an open procedure, then it concludes a contract (for
     instance for refinancing, undertaking guarantee, contribution to capital funds) with
     them the content of which is adjusted to the special features of the given instrument. The
     managing entity of the holding fund monitors the implementation, success, efficiency of
     programmes operated in the scope of specific contracts on an ongoing basis. The circle
     of possible implementers is open especially in the beginning of the term, thus enabling
     continuous assessment and probable changes. The key objective of the open system is
     to ensure the efficiency of implementation.

     In publicising the programme and operating it successfully we count on interest repre-
     sentation organisations that are functioning still, chambers of economy, and enterprise
     development organisations to a great extent, however, we consider the involvement of
     new organisations a possibility, as well.

     In connection with the programme we fund the training of the experts of executing
     organisations in the field of best practices of risk management, as may be elaborated on
     the basis of foreign experience.

     The Hungarian Enterprise Financing Limited Private Company is responsible for monitoring
     the implementation of financial programmes.

     On the whole, the restructuring of the institutional system for enterprise development
     enables small and medium-sized enterprises to access support in a faster and simpler
     way and it also cuts the operating costs of the state support network.




                                                           9
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                               9.

9.1.3. implementation of fixed State Support programmes aiming at Knowledge and
       infrastructure Development

By state supports for fixed purposes we wish to stimulate the investment and innovative
activities of enterprises, facilitate the utilisation of corporate management systems,
make it possible for enterprises to participate in training and requisition consultancy.
We want to facilitate the creation of new workplaces, the presence of human resources
with a proper knowledge and expertise, and the appearance of small and medium-sized
enterprises in foreign markets.

In order to offer non-refundable support, the integration of the institutional system for
enterprise development has been implemented, a one stop shop mediating institutional
system for entrepreneurs has been established, resulting in simpler and more transparent
procedures for enterprises. As a result of changes made to the organisational system task
provision efficiency is increasing, relative costs are decreasing. Operational standards for
the methods applied will be the same in case of each call for application.


      organisational scheme for the implementation of non-refundable support



      Donor level                              Donor (EC, Hungarian Budget)
                                      € HUF




                                            Managing Authority, Ministry
      National or regional level       responsible for operational programmes
                                      € HUF




                                                     Intermediary Body
                                      € HUF




                                                                € HUF

                                                                        € HUF

                                                                                € HUF




      Private sector                          SMEs




In the execution of non-refundable support schemes a participating organisation owned
by the Hungarian Development Bank plays the role of the Intermediary Body. In line
with the Government decision, in September 2006 the Hungarian Development Bank Ltd.
established the Hungarian Economic Development and Subsidies Centre Ltd., into which
the support mediating activity of the Hungarian Enterprise Promotion Public Benefit
Co., IT Information Society Public Benefit Co., and the Support Mediating Directorate
of the Hungarian Development Bank was wholly integrated; furthermore the EU tender-
related duties, personnel, and network infrastructure of the Agency for Research Fund
Management and Research Exploitation, as well.

In order that development resources of non-refundable supports are utilised regularly,
successfully and efficiently there is a separate monitoring system operating, with


                                                  99
9.                          IMPLEMENTATION AND MONITORING




     monitoring committees. The monitoring, measurement (with the help of monitoring
     indicators) and assessment of publicly financed non-refundable support is carried out
     by the National Development Agency. In the framework of this the Agency reports to
     the Government in the form of regular execution reports and studies.



     9.2. Monitoring

     9.2.1. introduction

     We want to ensure the implementation and execution of objectives outlined in the strategy
     by consistent monitoring measures in each intervention area. The aim of the strategic
     monitoring is to follow up programmes, initiations launched to boost the competitiveness
     of small and medium-sized enterprises, to review and assess results.

     The operation of the monitoring system – that has been up and running for 10 years now
     – for analysing the financial situation, performance of Hungarian enterprises serves for
      the continuous monitoring and analysis of the situation of the small and medium-sized
      enterprise sector and that of the changes occurred. We publish the results at regular
      intervals, in the form of annual reports.

     The target of the single monitoring system for the SME development strategy is to
     systematically collect and process all data and information – relevant from the aspect of
     strategy implementation –, and to feed them back to the planning process.

     Additionally, as provided by paragraph 12 of Act XXXIV. of 2004 on small and medium-
     sized enterprises and supporting their development the Government is to submit a
     report – elaborated by the Minister of Economy – on the situation of small and medium-
     sized enterprises and their set of economic criteria to the Parliament every two years. In
     this report the following issues are presented: government measures taken for reaching
     the targets set out in the enterprise development strategy, furthermore state support
     granted to small and medium-sized enterprises.

     Interventions incorporated into the strategy are implemented by several programmes. For
     instance, such as “In Tune with Business” Programme or Mid-term Science, Technology
     and Innovation policy Strategy, or the application schemes of 2007–13 Operational
     Programmes (Economic Development OP, Electronic (Public) Administration OP, Social
     Renewal OP, State Reform OP, Social Infrastructure OP, and Regional OPs) relevant for
     SME strategy. Operational Programmes and domestically financed programmes both
     have their detailed, programme-level monitoring systems operated consistently.

     The Ministry of Economy and Transport is responsible for the monitoring of the
     implementation of the strategy.




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 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                9.

9.2.2. measuring progress

Progress is made along indicators assigned to objectives specified in the “Objectives”
Chapter. In case of objectives with no indicators it is practical to specify the extent of
progress by utilising other, qualitative methods, by indirect indicators, expert estimates,
and further assessments.

The instrument for measuring progress is fundamentally the monitoring database
mentioned earlier, that collects and systematises data and information on the sector of small
and medium-sized enterprises. The system is partly based on foreign and Hungarian data
resources (Central Statistical Office, Tax Authority, Central Bank of Hungary, Hungarian
Financial Supervisory Authority, Ministry of Finance, Public Procurement Council, data
of organisations supporting the development of enterprises, databanks of the European
Union, OECD, EBRD, World Bank, UNECE, etc.) and their special processing, furthermore
it involves standardised surveys carried out among domestic SMEs. This database is to
ensure the monitoring of indicators related to the objectives of the present strategy.

On the basis of relevant indicators arriving to the database the monitoring system
continuously measures the progress made along these targets.


9.2.3 Data Collection

The following chart indicates the type of data to be measured and the regularity
of measurement to be carried out in order that the fulfilment of objectives could be
monitored and possible interventions made to the system could be implemented without
a significant delay. In every case the source of quantitative data is the single monitoring
database; the leader of the monitoring organisation is responsible for completing
qualitative assessments and measuring these targets.




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9.                             IMPLEMENTATION AND MONITORING




     the indicators of the implementation of the strategy’s objectives

                                                                          Base        target     measurement
     objective                                   indicator
                                                                          value       value       frequency

     increasing economic                 Gross added value (BHÉ)           52%         55%
                                                                                                  Annually
     performance of Smes                   produced by SMEs               (2005)      (2013)
                                         GDP-proportional tax and         3.1%       36.6%
                                                                                                  Annually
                                          contribution revenues           (2007)      (2013)
     Competitive share of public
     burden                            Intensity indicator of high tax
                                                                         77 points   65 points
                                        and contribution burdens on                               Annually
                                                                          (2007)      (2013)
                                            the basis of a survey
     Decreasing administrative
                                          Ratio of administrative          4.5%        3.5%
     burdens resulting from state                                                                 Annually
                                         burden costs in % of GDP         (2007)      (2013)
     regulation
                                       Unpredictability of economic
     Strengthening economic and                                          63 points   49 points
                                        regulation on the basis of                                Annually
     legal security                                                       (2007)      (2013)
                                        intensity indicator survey
     extending the range of higher       Ratio of SMEs capable of          20%         30%
                                                                                                  Annually
     financing risk products           involving external resources       (2005)      (2013)
                                            Own resources for
     increasing the accumulation                                          42.1%       45.1%
                                        accumulation purposes in %                                Annually
     of Smes                                                              (2005)      (2013)
                                           of gross added value
     improving the liquidity of Smes        Qualitative indicator        No data     No data         –
     Development of the knowledge
                                            Ratio of enterprises          27.6%        35%
     of entrepreneurs and their                                                                   Annually
                                          participating in training       (2007)      (2013)
     employees
     Development of
                                            Qualitative indicator        No data     No data         –
     entrepreneurial skill
                                         Ratio of SMEs purchasing          76%         5%
                                                                                                  Annually
     Development of business and           management service             (2007)      (2013)
     r&D infrastructure                Built-up density of Industrial      50%         65%
                                                                                                  Annually
                                                  Parks                   (2005)      (2013)
                                       Changes of e-Business index
                                        (in % of the index of the EU       56%         70%
                                                                                                  Annually
                                       member state with the best         (2006)      (2013)
                                                   results)
     Development of iCt
     infrastructure and use             Ratio of enterprises having
                                         an integrated corporate
                                                                           10%         25%
                                         management system and                                    Annually
                                                                          (2006)      (2013)
                                        employing a staff of more
                                                   than 5
                                                                          12,000      15,600
                                          Gross added value per
     improving productivity                                                EUR         EUR        Annually
                                                employee
                                                                          (2005)      (2013)
                                         Employment participation          69%         69%
     expanding employment                                                                         Annually
                                                of SMEs                   (2005)      (2013)
     integration into global                                               35%         37%
                                       Export participation of SMEs                               Annually
     economy                                                              (2005)      (2013)
     more efficient inter-company           Ratio of enterprises          49.%        60%
                                                                                                  Annually
     cooperation                        participating in cooperation      (2007)      (2013)




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    Strategy for the Development of Small and Medium-sized Enterprises
                                                                                               9.

9.2.4. reports, assessments

Information on progress are available via queries set up for this purpose, assigned to the
database, and are based on other assessments. Reports regarding the monitoring and
their scheduling are as follows:

•   An annual report is compiled on the implementation of the SME strategy, describing
    the situation of the SME sector and the comprehensive assessment of strategy
    implementation in a single structure, with the help of indicators, expert analyses, and
    international benchmarks.
•   In accordance with (mainly EU) programmes covered by the strategy the interim
    assessment of the strategy will be completed in the first quarter of 2010.

Annual progress reports are public. Progress reports present last year results and
results projected and forecasted for the total duration of the strategy along strategic
objectives.



9.3. Partnership

Considering the significant role of SMEs in the economy, for easing the operational
conditions of enterprises and elaborating effective enterprise development programmes
it is essential to engage in a continuous dialogue – ensuring professional approach and
trust – with organisations representing enterprises. In order to do so, in the course of
elaborating major governmental measures and programmes it has to be ensured that
professional organisations are given the possibility to cooperate during the whole process
and participate in the information flow.

Efforts have to be made for SME organisations to be given a greater role in the provision
of public duties. For this it is necessary to involve these organisations and grant targeted
support to their enterprise development activities along identical principles.

Among organisations representing enterprises Competitiveness Council and Enterprise
Development Council (EDC) have an outstanding significance. The Enterprise Develop-
ment Council was established in December 1995. The tasks, members, and functioning
of the organisation are currently provided by Act XXXIV of 2004 on small and medium-
sized enterprises and supporting their development.

The Enterprise Development Council participates in the shaping of SME development
strategy; in the scope of this:

a) it makes recommendations for professional programmes and measures serving as
   a basis of SME development strategy,




                                             103
9.                          IMPLEMENTATION AND MONITORING




     b) gives opinion on professional programmes aimed at SME development,
     c) makes recommendations for objectives to be supported by the budget appropriation
        and for the division ratio of resources among objectives, with a special emphasis on
        micro and small enterprises’ appropriate volume of support,
     d) assesses the efficiency of central state administrative bodies’ and SME development
        organisations’ programmes operated from budgetary resources, furthermore reviews
        whether the programmes comply with the SME development strategy,
     e) assesses the volume of SMEs’ share of budgetary subsidies, enterprise loans, and
        public procurement,
     f) gives opinion on draft bills concerning SMEs.

     Enterprise Development Council’s membership consists of representatives of associated
     ministries, chairpersons of chambers and entrepreneurial interest representations.
     Granted the right to consult, further stakeholders participate in the work of the EDC.

     The implementation of regulatory-type measures – within the system of responsibility
     approved by the Government – is the task of the competent governmental body
     (portfolio). The ministry (office) responsible regularly updates MoET, which organises
     sessions for discussing the results with the representatives of the entrepreneurial sector
     alike (Competitiveness Council, Competitiveness Round Table, Enterprise Development
     Council, etc.).

     In respect of the New Hungary Development Plan (NHDP) the provision of methodological
     tasks relating to the application of the partnership principle – partnership strategy,
     partnership actions, partnership reports – in the course of social conciliation, keeping
     contact with key partners, partners’ involvement in professional cooperation, furthermore
     the compilation of a strategy and reports on the utilisation of the partnership principle
     are of extraordinary importance for the Government of Hungary and the European
     Commission.

     Community supports belonging to the line of development tools have been/are to be
     prepared, funded, monitored, and assessed on the basis of the partnership principle. For
     the sake of this extensive associations have been established, with the involvement of
     local and other public administration authorities, economic and social partners, and all
     competent bodies.

     The National Development Agency (NDA) is responsible for the provision of NHDP and
     Operational Programme tasks relating to information dissemination and publicity, with
     respect to the requirements stipulated in Hungarian and Community legislation.

     The implementation of activities related to information provision and publicity entails
     obligations for both the actors of the institutional network (NDA, Intermediary Bodies)
     and the beneficiaries alike. These obligations are described in the individual operational
     programmes.


                                                 104
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                               9.
The government proposal on SME development framework for 2007–2013, adopted on
7 February 2007 and serving as the core of the strategy, was drawn up in 2005 after
broad social debate and negotiations. The social discussion of the scheme took place
in several rounds in the frames of the Enterprise Development Council and the National
Council for the Reconciliation of Interests. The Enterprise Development Council and the
National Council for the Reconciliation of Interests have discussed the present strategy,
as well, and have unanimously supported it.

It is one of the keys to the success of the SME development strategy alike that it is
implemented in cooperation with local, regional, sectoral, and social players. The portfolio
responsible for the implementation of the strategy reports on its execution and the results
of implementation to the Enterprise Development Council and the National Council for the
Reconciliation of Interests on a regular basis.




                                            105
10.




                        STR ATEGIC CONSISTENCY
                                 AND COHERENCE



      10.1. The Consistency of the Strategy

      Small and medium-sized enterprises are given an important role in reaching several crucial
      social targets. They can contribute to diminishing regional differences, eradicating poverty,
      and boosting employment. However, they can fulfil this role only if they increase their
      income production. Therefore only a development policy focused on the competitiveness
      and income production of small and medium-sized enterprises can lead to reaching the
      horizontal targets.

      One of the prerequisites of developing disadvantaged territories is increasing local income
      production and employment. Several positive foreign experiences underpin the fact that
      an important tool for this is the development of local small and medium-sized enterprises,
      especially if the tools utilised are suitable for coping with market failures resulting from
      regional imbalances. The distribution of small and medium-sized enterprises’ income
      production per inhabitant is already more even than that of large corporations’. The
      biggest regional difference in case of small and medium-sized enterprises is less than
      four-fold; in the case of large corporations it is more than eight-fold. In rural regions
      the relative income production of small and medium-sized enterprises shows 1.5 times
      difference; in the case of large corporations it is nearly four-fold. International experience
      reveals that market development, sustainable enterprise development programmes are
      effective tools for the development of small enterprises operating in disadvantaged
      territories, as well, therefore should they be utilised, the regional income balancing
      effect of small and medium-sized enterprises could be strengthened. Observing the
      considerations of disadvantaged territories, a territory-specific combination of financial
      instruments, supports/aids, entrepreneurial infrastructure development, and training/
      education programmes can be evolved.

      Enterprise development is an important instrument in the catching-up of low income
      groups or groups that are in a disadvantaged situation due to other reasons. Sustainable


                                                   106
                                                                                            10.
enterprise development programmes are especially suitable for increasing these
groups’ income production potential and decreasing unemployment, the rate of
which is very high currently. Providing part time work and raising the ratio of family-
friendly workplaces are important tools in optimising disadvantaged groups’ chances
for employment. Similarly to those mentioned in the section on the development
of disadvantaged territories we elaborate instrument combinations tailored to the
specific features of the given group.

The development of micro and small enterprises constitutes an integral part of the
programmes for combating poverty.

In the course of elaborating the development policy we have built on the National
Development Policy Conception, New Hungary Development Plan, and the Convergence
Programme of Hungary in each subdivision. In line with this the strategy is in accordance
with the key objectives of New Hungary Development Plan, namely growth and employment.
The specific objectives of permanent growth, such as improving competitiveness,
widening the basis of economy, and developing the business environment primarily – but
not exclusively – serve the broadening of the basis of economy. In the execution of NHDP
measures related to the implementation of the strategy appear in the economic development
priority axis of NHDP. The SME development policy is in accordance with the Reviewed
National Lisbon Action Programme, as well. The measures and planned interventions of
the strategy are incorporated in the “dynamization of business environment” priority of
the microeconomic chapter of the Action Programme.

New Hungary Rural Development Programme (HRDP), coordinated by the Ministry
of Agriculture and Rural Development and containing measures for the development
of micro enterprises, as well, is in line with the small and medium-sized enterprise
development strategy. HRDP – together with domestic co-financing – will make the
utilisation of an EU source of nearly HUF 1.400 billion possible in 7 years. Among the
4 sets of measures of HRDP the third set of measures (HUF 1 billion between 2007–
2013) has the following objectives: improvement of the living standard in rural areas,
promotion of the diversification of economic activities. Within the set of measures the
majority of the resources (60%) is utilised in enterprise development and in rural areas
in the promotion of economic growth and employment – in line with original intentions.
Along the connection points of HRDP and NHDP special attention has to be paid to the
coordination of programme planning and implementation.

In accordance with the 3-year-strategy of the Ministry of Economy and Transport, adopted
in 2007, the small and medium-sized enterprise development strategy highlights the
promotion of the business sphere – and within that the promotion of small and medium-
sized enterprises’ R&D and innovative activities –, emphasises the importance of an
improved business environment, and the necessity of SMEs’ access to funding and new
technologies.




                                           107
10.                       STRATEGIC CONSISTENCY AND COHERENCE




      ”In Tune with Business” Programme constitutes an important part of the SME strategy; in
       the course of the programme the circumstances hindering the operation of entrepreneurs
       are to be revealed (e.g. in the areas of company and tax administration, enterprises’ legal
       security, financial operating conditions, fairness of competition, etc.). The programme
       serves the interest of SMEs primarily, due to its nature. The smaller an enterprise is,
       relatively larger the burden of unnecessary bureaucratic obstacles, market inadequacies,
       problems will feel. The effort described here is of key importance in the Lisbon Agenda
       of the EU, as well.



      10.2. The Coherence of the Strategy

      In the integrated strategy the economic performance and situation of small and medium-
      sized enterprises and the factors hindering their growth have been presented. In order
      that intervention areas can be defined, factors determining the economic performance
      of small and medium-sized enterprises have been mapped out. We have completed a
      SWOT analysis for that.

      Subsequently these factors were grouped on the basis if they influence the economic
      performance of small and medium-sized enterprises in a positive or a negative way. For
      instance state subsidies have a positive effect on enterprises’ access to funds, while an
      unreasonably risk-avoiding bank loaning policy makes it more difficult for them to access
      funds.

      Factors hindering the development of enterprises were classified in 2 groups, as well. The
      market will have a decisive role in the shaping of certain factors. As regards other factors,
      we reckoned that state intervention is necessary in order to improve the situation of
      enterprises. We have outlined new development targets for the latter group. For reaching
      the targets set this way, we have elaborated instruments for development.




                                                   10
                                                                                              11.




                                   APPENDIX




11.1. Key European Union Experiences of Small and Medium-Sized Enterprise
      Development

11.1.1. the european union Strategy and Specific recommendations for Boosting the
        Competitiveness of Small and medium-Sized enterprises

The European Charter for Small Enterprises is a Community document of key importance
on the support of small and medium-sized enterprises; it was made public as Appendix
III of the Presidency Conclusions of the European Council session of 19 June 2000, held in
Santa Maria da Feira. It defines the place and role of the sector in the European economy
and society, in addition it stipulates a set of instruments for Member States. Among the
tasks state subsidies in the traditional meaning can be found as well, which are primarily
measures promoting the improvement of the entrepreneurial environment. As the
main lines of action, it has set the following targets on EU and national levels: teaching
entrepreneurial studies, cheaper and faster start-up, better legislation and regulation,
provision of professional knowledge, improvement of online access, better exploitation
of the single market, taxation and financial issues, strengthening the technological
performance of small enterprises, elaboration of a successful business model and the
highest level support scheme for small enterprises, furthermore having a stronger and
more efficient representation of small enterprises’ interests in place.

The area of taxation and financial issues is the closest to the traditional set of state
instruments. According to the Charter the restructuring of tax systems is to be
implemented in a way that they remunerate success, promote the start-up of enterprises,
initiate the growth and job creation of small enterprises, and make the establishment
and succession of small enterprises easier. Ameliorating access to financial services
belongs to the scope of state activities as well, and in order to facilitate it the Charter
stipulates that obstacles hindering the implementation of Financial Services Action Plan
and Venture Capital Action Plan are to be identified and eliminated, which in certain
cases may result in the outflow of financing sources from a country to territories offering


                                            109
11.                                          APPENDIX




      more favourable conditions. Establishing the proper conditions for accessing credit and
      entrepreneurial capital demands the improvement of the connection between the bank
      system and small enterprises, in addition it initiates the enhancement of access to the
      Structural Funds, and welcomes the initiations of the European Investment Bank to
      increase the volume of financial assets at the disposal of high-tech companies, including
      the Bank’s own capital assets.

      According to the European Commission’s 2003 Entrepreneurship in Europe “Green Paper”
      the 3 pillars of the most important tasks are
      • to bring down the barriers of enterprise launch, development, and growth,
      • to restitute the balance between entrepreneurial risk taking and achievable results, and
      • to enhance the acknowledgement of entrepreneurship by society.


      As per the abovementioned the willingness to enterprise is to be increased by developing
      entrepreneurial skills (in the scope of education), bringing down the obstacles of
      market entry, and increasing the outcome expected from entrepreneurs’ risk taking;
      the development of enterprises is to be supported by establishing an entrepreneur-
      friendly regulatory environment, reducing taxes and contributions, offering skilled staff,
      extending the capital market (financing opportunities), aiding innovations, and creating
      enterprise opportunities within the company; the acknowledgement of entrepreneurship
      by the society is to be enhanced by improved reception of occasional failures and by
      disseminating entrepreneurial thinking in the social sphere and among cooperations,
      associations, and foundations alike.

      The European Union’s EUR 450 million budget Multiannual Programme for Enterprise
      and Entrepreneurship, and in Particular for Small and Medium-Sized Enterprises (MAP)
      for 2001–2005 set out similar targets than the Charter. The main objectives are identical:
      evolvement of entrepreneurial spirit, stimulation of business environment development,
      provision of services assisting efficient enterprises, and preparation of enterprises for
      the new challenges of the expansion. Key targets of the 5-year plan:

      •   boosting enterprises’ growth and competitiveness in a knowledge-based international
          economy,
      •   development of entrepreneurial spirit, culture in target groups,
      •   simplification and advancement of enterprises’ administrative and regulatory environ-
          ment in order that research, innovation, and enterprise foundation can ‘flourish’
      •   improvement of SMEs’ financial situation (the bank network specialised in SME
          financing has 5 members and more than 10,000 branches in the EU-15),
      •   facilitation of the utilisation of Community support services, programmes; improving
          their coordination (EIC-network),
      •   dissemination of best practices; their better integration to the existing innovation
          promotion instruments.




                                                  110
  Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                 11.
MAP was prolonged until 31 December 2006, and after 2007 it will cease to exist as
an independent programme since it will be incorporated into the New Framework
Programme on Competitiveness and Innovation (CIP), in line with the 6 April 2005
European Commission recommendation on the establishment of the Competitiveness
and Innovation Framework Programme (2007–2013).

Halting implementation of Lisbon targets has brought enterprise strengthening in the
forefront. The enterprise policy of the EU puts a special emphasis on the promotion of
innovative small and medium-sized enterprises. As specified in the Framework Programme:
it has to be ensured that financing is limited to the elimination of market inadequacies only,
therefore – in order to avoid market distortions – financing granted from the Framework
Programme must be compliant with Community regulation on state subsidies, the related
instruments, and the valid Community definition of the notion of SMEs. The 4 common
targets of the Framework Programme, namely 1. promotion of enterprises’ (especially
SMEs’) competitiveness, 2. supporting innovation and eco-innovation, 3. accelerating
the development of a competitive and innovative information society, and 4. supporting
energy efficiency, new and renewable energy sources in all sectors, are assisted by
3 subprogrammes. One of the subprogrammes is the Subprogramme for Enterprise
Development and Innovation, supporting enterprise development, SME development,
competitiveness, and innovative activities in the field of industry and services. It puts
an emphasis on SME financing, establishment of (cross border) favourable conditions
for inter-SME cooperation, innovation of enterprises, development of entrepreneurial
culture, economic and administrative reform, and mitigation of bureaucratic obstacles.
CIP focuses on solving problems related to capital investment, venture capital, and SMEs’
access to credit; issues which are managed by the European Investment Found on behalf
of the Community.

The enterprise development strategies of the EU regard the issue of environmental
sustainability a priority. Their aim is to strengthen the SME sector and help SMEs in
adjusting to newly occurring challenges. Among these challenges the following are
of key importance: fulfilment of obligations resulting from environmental regulation,
tasks generated as a result of combating climate change, and the exploitation of market
benefits brought by these tasks.

 For the implementation of the Community Lisbon Programme the Commission issued
 two communications: ”Modern SME Policy for Growth and Employment” in 2005, and
”Fostering Entrepreneurial Mindsets through Education and Learning” in 2006. The
 communication “Modern SME Policy for Growth and Employment” provides a single
 framework to various enterprise-related policy instruments. Its objective is to uphold the
“Think Small First” principle in all EU policies. The communication makes recommendations
 for the simplification of rules and regulations, supporting entrepreneurial culture, and
 helping SMEs to access innovation, financing, education, and European/international
 markets. Better communication and stakeholder communication are integral parts of
 the new SME policy. The mid-term review of the policy is to commence in autumn 2007.


                                             111
11.                                          APPENDIX




      One of the cornerstones of the review is the establishment and strengthening of an SME
      policy which is sustainable from an environmental aspect.

      The aim of communication titled “Fostering Entrepreneurial Mindsets...” is to provide
      assistance for Member States in elaborating a more ordered strategy for teaching
      entrepreneurial studies.


      11.1.2. State and outcome of State Subsidies in the european union

      The EU wishes to decrease individual subsidies granted to selected sectors, corporations,
      but at the same time it is more permissive regarding so-called horizontal subsidies serving
      general purposes. The promotion of R&D, improvement of education, environmental
      protection and energy saving belong to this category, and multidirectional support
      granted to small and medium-sized enterprises in numerous forms is classified here,
      as well, in order to make start-up, growth, and in certain cases changes and company
      handover-takeover more easier for enterprises. One of their emphasised conclusions
      is that state subsidy is not the one and only economic policy instrument that is able to
      provide help in the treatment of problems occurring in market operation and encountered
      by small and medium-sized corporations. Therefore upon setting support objectives it
      has to be examined in every case if the implementation can be assisted by consultancy
      and information services, the acceleration of structural reforms, or the combination of
      these, instead of state subsidy. At the 2001 Stockholm session of the European Council
      members undertook an obligation for the further decrease of state aids, redirection to
      horizontal objectives.

      The European Commission’s action plan for state aids, published in June 2005, serves
      this purpose [State Aid Action Plan (COM (2005) 107 final) 7. 6. 2005]. The objective of
      the action plan is to specify a schedule for the 2005–2009 reform of state aid, in order
      that less and more targeted state aid can be realised. Under Article 7 of the EC Treaty
      all forms of aids granted by Member States or state sources, leading to or threatening
      with the distortion of the competition by giving preference to certain enterprises or
      the production of certain goods are prohibited in case this affects the trade between
      Member States. The Treaty allows special exclusions from the prohibition of state aid
      in cases when the support programmes recommended may have a beneficial effect on
      the EU as a whole. A state aid is considered compliant with the Treaty provided it fulfils
      clearly outlined public objectives and does not distort competition and trade within the
      Community, which would be against the common interest. Moreover, in certain cases
      state aid measures can be efficient tools for the implementation of targets of common
      interest, can correct market deficiencies, thus contributing to the improvement of the
      operations of markets and boosting the competitiveness of the European economy.
      New challenges, the new Lisbon Action Programme, the extension of the Union, and
      the increasing complexity and growing number of the documents adopted by the
      Commission in the meantime make the modernisation of state aid policy necessary.




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 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                              11.

   The reform package on state aids is based on the following elements:
   • less and more targeted state aid
   • a more precise economic approach
   • more efficient procedures, better execution, greater predictability, and increased
     transparency
   • sharing responsibilities between the Commission and Member States




The aid policy of the Union focuses on  key areas:
• Promotion of innovation and R&D in order to strengthen knowledge based society,
• Creation of a better business environment and promotion of entrepreneurial activity,
• Investment in human capital,
• High quality services of general economic interest,
• Better identification of priorities by simplifying and consolidating regulations on group
  exemption,
• Targeted regional aid policy,
• Promotion of an environmentally sustainable future,
• Development of an up-to-date transport, energy industry, and information/
  communication technology infrastructure.

Among these the creation of a better business environment, promotion of entrepreneurial
activity, simplification and consolidation of regulation on group exemption concern small
and medium-sized enterprises directly.

For making it easier to launch new enterprises faster the Commission has reviewed
the communication on venture capital investments. The purpose of the review was to
contribute to entrepreneurial culture and to promote investments further in the form of
venture capital investments – especially in the case of start-up and young, innovative
SMEs where this would offer a proper solution for eliminating market deficiencies already
identified. In order to ensure the diversity of measures for venture capital investments,
the Commission pays special attention to further increasing the flexibility of rules, in
particular to the maximum allowed level of tranches of such safe-harbour investments
where there is presumably a so-called equity gap.

In the Action Plan the Commission – in order to guarantee better governance and
promote the granting of aids which are obviously compatible with the Treaty –
planned to issue a general group exemption regulation that exonerates certain aid
types from the obligation of being reported to the Commission. By creating a general
group exemption category the Commission aims at simplifying and consolidating
existing group exemptions (training, SME and employment). In the meantime a part
of the relevant group exemption regulations have been modified, and the effect of
the remaining part has been prolonged. The regulation on SMEs belongs to the
latter group, therefore on 20 December 2006 the Commission prolonged the effect


                                               113
11.                                          APPENDIX




      of regulations on group exemption for state aids granted to small and medium-sized
      enterprises until 30 June 200.

      2007. As of 1 January 2007 the new regional guideline of the Commission came into
      effect, which – besides ’allowing’ new, flexible opportunities for start-up enterprises –
      laxes the regulation in several points. Moreover, in order to take economic development
      into consideration, the maximum threshold of ’de minimis’ aids that may be granted by
      Member States without any additional requirements has been raised, as specified in the
      European Commission Regulation No. 199/2006 on the application of Articles 7 and 
      of the EC Treaty. The Regulation aims at simplifying rules and facilitating the operation
      of small and medium-sized enterprises. Under the decision – which is favourable for
      SMEs – the maximum threshold for de minimis aids was raised to EUR 200,000, with the
      exception of road transport activity, where this limit is EUR 100,000. The essence of the
      regulation is that the total amount of aids – including financial instruments – granted to
      a given beneficiary in the course of 3 years cannot exceed the maximum threshold. The
      new regulation does not cover aids granted to enterprises struggling with difficulties
      and to aids the amount of which cannot be calculated in advance, since these leave a
      room for market distortion.

      The Competition DG of the EU has been issuing its State Aid Scoreboard since 2001.
      This document assesses aids granted to enterprises from national or Member State
      sources on the basis of 3 ’dimensions’: aid form, granter, purpose, by Member States
      and regarding the Union as a whole. According to the Report State Aid Scoreboard
      [(Autumn 2005 Update) COM (2005) final, 9.12.2005] the volume of state aids rather
      stabilised than decreased in the EU in the past 5 years, however, the GDP proportional
      ratio of state aids considerably dropped compared to the 90s. The most recent Report
      State Aid Scoreboard [autumn 2006 update – COM (2006) 761 final], too, reflects the
      fact that Member States have paid moderate attention to the European Council notice
      for granting less state aid; at the same time they gave a favourable reply to the second
      objective of the Council, namely granting more targeted aids. In the scope of this by the
      end of 2005 more than half of the Member States had appropriated more than 90% of
      state aids for horizontal objectives representing common interests.




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                                                                                                                   11.
 Change trends of state aids in eu member states, 1995–2005
                                                                                                 2001–03 2003–05
                    1995 1996 1997 1998         1999   2000   2001   2002   2003   2004   2005
                                                                                                 average average
 eu-25
 Total state aid
– without rail-
                                                                                   64.7   63.
 ways, billion
 EUR
 In % of GDP                                                                       0.61   0.59
Total state aid,
excluding agri-
culture, fishing,                                      49.1   49.9   56.5   50.4   46.0   45.1    52.3    47.2
Transportation,
billion EUR
 In % of GDP                                           0.4   0.4   0.54   0.49   0.43   0.42    0.50    0.45
 eu-15
Total state
aid – without
                    7.1   76.7   97.2   65.1   56.4   60.2   61.5   6.0   56.6   59.1   5.7    62.0    5.1
railways,
billion EUR
 In % of GDP        0.9   0.94   1.13   0.73   0.61   0.62   0.63   0.6   0.57   0.5   0.57    0.63    0.5
Total state aid,
excluding agri-
culture, fishing,   57.9   57.5   77.6   49.5   39.9   43.9   45.4   50.5   40.4   42.4   42.2    45.4    41.7
Transportation,
billion EUR
 In % of GDP        0.72   0.70   0.90   0.56   0.43   0.45   0.46   0.51   0.41   0.42   0.41    0.46    0.41
 (Comment: High values for the years 1997 and 2002 can be explained by the cases of Credit Lyonnais
 (France) and Bankgesellschaft Berlin AG.)
 Source: Report State Aid Scoreboard, autumn 2006 update, presented by the Commission


While Germany, France, the United Kingdom, and Spain granted the most aids at an
absolute value, regarding relative value Hungary is the second largest aid granter after
Malta; ahead of Finland, Cyprus and Sweden. This means that according to the register
of the Report State Aid Scoreboard, EUR 1.6 billion worth of state support was granted
to the business sector in Hungary, that is 1.3% of the GDP. (Table: 2005 State aids for
horizontal and sectoral purposes)




                                                        115
11.                                                    APPENDIX




       2005 state aids for horizontal and sectoral purposes, in % of the total aid
                       aids for        employ-
                                                      regional                             training   environmental protection
                      horisontal        ment                          r&D        Sme
                                                    development¹¹                         subsidies     and energy efficiency
                      purposes        subsidies
       EU-25              84                             19           12            10       2                   2
       BE                100               5              16            20           39       7                   10
       CZ                100               1              52           26            1       0                    2
       DK                  97             42               0             4            0       0                   47
       DE                  81              1              1           10             3       0                   47
       EE                100               1              1            21           24       2                    7
       EL                  97             19              56             3            5       0                   10
       ES                 66               1              32             9           10       2                    5
       FR                 88              1              16            21           21      1                     2
       IE                  74             12              25           12            10       2                    2
       IT                 96              20              27           14            20       9                    3
       CY                 45               0               4             3            1       6                    1
       LV                  97              0              7             0           19       0                    0
       LT                  81              6              42             9           14       0                   10
       LU                100               0              2            27           22       0                    
       hu                 48               1              2             5            4       0                    1
       MT                   3              0               0             0            0      1                     0
       NL                  97              0               2            22            5       0                   65
       AT                 95               3              14           26            30       6                   15
       PL                  70             34              21             4                   2                    1
       PT                 26               4               5             1            6       9                    0
       SI                 86              15              15            24            9       2                   15
       SK                  61              0              55             1            1       2                    0
       FI                  97              6              12           26             7       0                   40
       SE                100               0               5             3            1       0                   
       UK                  91              1              1            17           16       7                   2


      ¹General regional development aid not classified elsewhere ²In case of certain sectors
       aid granted alongside measures with no horisontal objectives or saving and restructuring support.
       Source: Report State Aid Scoreboard, autumn 2005 update, presented by the Commission




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                                                                                                                          11.
                      (in %, except agriculture, fishing, transportation)
                                     proces-                        other,                   total aids, except agric.,
   other aids for      Sectoral                 Coal mining                       Service
                                      sing                      non-processing                fishing, transportation
horisontal purposes   subsidies²                 subsidies                       subsidies
                                    industry                      industries                       (million eur)
        4                 16            4             9                  1           2                45094
        3                  0            0             0                  0           0                   700
        0                  0            0             0                  0           0                   387
        3                  3            3             0                  0           0                 1074
        2                 19            1            1                  0           1                15172
       2                  0            0             0                  0           0                   14
        5                  3            1             0                  1           1                  257
        7                 34            0            33                  0           0                 3284
      10                  12           11             0                  0           0                 6486
       11                 26           14             0                  0          12                  424
        3                  4            2             0                  0           2                 5328
       31                 55           3             0                15            2                  135
        0                  3            3             0                  0           0                   29
        1                 19            3             0                15            0                   26
      15                   0            0             0                  0           0                   43
        9                 52           4             4                  0           0                  949
        2                 97           97             0                  0           0                  117
        3                  3            3             0                  0           0                 1183
        1                  5            0             0                  0           5                  597
        0                 30            5            24                  0           0                  908
        0                 74            0             0                  0          74                  957
        7                 14            0            14                  0           0                  100
        1                 39           39              1                 0           0                  245
        6                  3            0             0                  0           2                  559
        4                  0            0             0                  0           0                 2613
        3                  9            0              1                            0                 3509




                                                                   117
11.                                                    APPENDIX




      As demonstrated by the table, in Hungary, Cyprus, Portugal and Malta less than half of
      state aids is appropriated for horizontal objectives. The 4% participation appropriated
      for domestic horizontal objectives means a rise compared to 2000–2003, when on average
      42% of aids was spent on horizontal objectives and 5% on sectoral support, primarily on
      supporting certain industries.

      The Report State Aid Scoreboard illustrates the development of support granted in
      the scope of group exemption regulations. Considering that Member States utilised
      opportunities provided by the regulation on group exemption to an ever growing
      extent, the number of notifications relating to the permission of such support types has
      plummeted since 2001. The majority of Member States applied for group exemption
      regarding the support of small and medium-sized enterprises. Until the middle of 2006
      some 1,500 notification sheets had been submitted on group exemption forms.

       number of measures on which notification forms were submitted in the framework of group exemption
       regulation of state aids, 2001–2006 (until 30 June 2006), eu-25
       type of group exemption                                                              1st half
                                     2001        2002       2003       2004       2005                      total
       state aids                                                                           of 2006
       SME                            101        123        139        149         19         3            793

       Training                        4         0         55          79         69         32            363

       Employment                       –          0                    21         26         21              76

       Agricultural sector              –          –            –        72                  56            216

       Fishing                          –          –            –         1         22          6              29

       Total                          149        203        202         322        403        19           1,477
       Comment: Withdrawn notifications are not included in the table. Data for the new member states are
       indicated as of 1 May 2004.
       Source: Competition Directorate-General


      The group exemption regulation on granting state aid to small and medium-sized
      enterprises was amended in February 2004, resulting in extending the possibility of group
      exemption to R&D aids, as well. Member States exploited this opportunity to a growing
      extent. In 2005 20% of group exemption measures relating to state aids granted to small
      and medium-sized enterprises concerned R&D subsidies. As regards expenditure, in
      2004 in the framework of training, employment, and small and medium–sized enterprise-
      linked group exemption regulation decisions were made over EUR 3.4 billion. In the
      scope of this 25 Member States have accounted for a support of EUR 2.1 billion in case
      of aids for small and medium-sized enterprises, and for EUR 1.1 and 0.2 billion in case of
      training and employment aids, respectively. In the European Union aids granted within
      the framework of group exemption account for some 10% of aids for the implementation
      of horizontal targets, however, in a few Member States this ratio is significantly larger: in
      Belgium it is 14%, in Greece 16%, in Poland 21%, in the United Kingdom 22%, and in Italy
      31%. As we have mentioned it in the section on the action plan, on 20 December 2006
      the Commission prolonged the effect of regulations on group exemption for state aids
      granted to small and medium-sized enterprises until 30 June 200.


                                                          11
 Strategy for the Development of Small and Medium-sized Enterprises
                                                                                     11.
The Scoreboard does not include sums granted as small amount aids, since these are
considered even by the Commission itself as aids not threatening the competition
substentively.




                                        119
11.                                                APPENDIX




                          11.2. Cause–effect analysis of the SME sector


                                   Cause–effect tree – regulation



          1. Regulation              Financing                   Knowledge                Infrastructure




                                                                                          Quality of rule
                                  Rules specifying             Rules stipulating
         Rules specifying                                                                  application
                                  the operational                 cessation,
      enterprise foundation,
                                    environment                  termination/
         market entrance
                                   of enterprises                 market exit
                                                                                          Predictability,
                                                                                          transparency,
                                                              Regulation on final        enforceability of
       Legal frameworks              Legislation
                                                                 settlement                 regulation
         specifying the           stipulating public
      start-up of individual           burdens
           companies
                                                              Law on bankruptcy,         Law enforcement
                                                             possible reactions to
                                  Reporting, audit,
                                                             payment difficulties
                                 and data provision                                      e-governmental
      Regulation specifying
                                    obligations                                             services
          the start-up
         of companies
                                                               Liquidation rules
                                     Rules on                                               Awareness
          Authorisation            employment,                                            of regulations,
           of activites           employment law                                           knowledge of
                                                                                         economic players

                                 Public procurement
                                        rules



                                     Consumer
                                  protection rules



                                      Financial
                                     legislation



                                   R&D regulation



                                     Regulatory                    Pillars
                                   environment of
                                 electronic economy                Cornerstone factors

                                                                   Specific factors




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Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                   11.


                                     Cause–effect tree – financing



       Regulation                     2. Financing                     Knowledge               Infrastructure




    SMEs’ own                   State                SMEs’ access           SMEs’ access
     sources                redistribution             to credit             to capital         Buyer–supplier
                                                                                                    financial
                                                                                                relations, asset
  Start-up assets,                                                                              based financing
                               Tax and               Economic past,
    willingness                                                               Investment
                            contribution                 income
     to invest                                                              information on
                              payment                  production
                                                                                 SMEs
                            obligations of           ability of SMEs
                             enterprises                                                        Buyer–supplier
      Income                                                                                     agreements,
    production                                                                   Exit              payment
                                                       Bank loan
       ability                                                               opportunities        deadlines
                                                       policy, risk
                            State subsidies           management

   Involvement of                                                           Expected yield        Behaviour of
    sources from                                                            of investment in     factoring firms
                                                       Collateral
   friends, family                                    provided by                 SMEs
                                                      enterprises
                                                                                                 Use of leasing
     Financial                                                               Transactions’
      culture                                                                  economy
                                                     Transactions’
                                                       economy                  of scale
                                                                                                  Awareness,
                                                        of scale
                                                                                                 prevalence of
                                                                                                   factoring
                                                                             Risk manage-
                                                       Quality of          ment capacity of
                                                     SMEs’ financial       state and private
                                                       planning             venture capital
                                                                             investments




         Pillars

         Cornerstone factors

         Specific factors




                                                           121
11.                                              APPENDIX




                                   Cause–effect tree – Knowledge



           Regulation                Financing                  3. Knowledge                Infrastructure




         Internal factors         External factors             (Professional)            Entrepreneurial skill
           of corporate            of corporate                Qualification of
          management               management                    employees

                                                                                            Willingness to
          Management                                                                         enterprise
                                 Range of corporate              General skills
            skills and             management                   (e.g. language,
           knowledge                 services                 financial, e-skills)
          of enterprise
                                                                                         Social acceptance of
             leaders
                                                                                          entrepreneurship

                                Access to information           Professional
                                                                knowledge of
        Management and                                           employees
       leadership studies                                                                  Innovativeness
          and approach              Efficiency of
        in school system         supported training,
            education           consultancy services
                                                                                           Linking technical
                                                                                            education with
                                                                                          teaching business
      Vocational knowledge
                                                                                                 skills
         of SME leaders



        Use of corporate-,                                                               Teaching the basics
      quality-, environment-,                                                            of how to start-up an
      and other management                                                                    enterprise
             systems




            Efficiency,
         organisation of
          inter-company
        business relations




         Acceptance and
        exploitation of the
       results of scientific
            research


                                                                   Pillars

                                                                   Cornerstone factors

                                                                   Specific factors




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Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                    11.

                               Cause–effect tree – infrastructure



       Regulation                 Financing                     Knowledge       4. Infrastructure




       Basic physical                         Business and R&D
                                                                             ICT infrastructure
       infrastructure                           infrastructure



                                            Infrastructure within           Access to ICT network
   Public utility provision
                                              incubator houses,                  structure
                                             industrial parks and
                                          industrial branches and
                                         the availability of related         Informatisation of
   Transport infrastructure
                                                  services                  corporate processes



                                                 Availability of               Use of ICT tools
                                           technological centres,
                                          research–development
                                                institutes, and
                                            institutional, network
                                            structures linking the
                                            former to enterprises




         Pillars

         Cornerstone factors

         Specific factors




                                                    123
11.                                               APPENDIX




                                     11.3. Areas of intervention


                                  areas of intervention – regulation


          1. Regulation
                                                                  Development of            Development of
         specifying the
                                  Access to financing             entrepreneurial           entrepreneurial
      operating conditions
                                                                    knowledge                infrastructure
         of enterprises




                                               Administrative burdens                     Economic and
      Trends of public burdens
                                              resulting from regulation                legal security, unfair
                                                                                           competition

                                                    Prerequisites
          Taxation trends
                                                   of market entry
                                                                                         Predictability of
                                                                                        regulation, impact
                                                                                       assessment system
         Trends of tax and                         Authorisation
         contribution basis                         procedures

                                                                                      Information provision
                                                                                      for economic players
                                             Administrative obligations
                                                 related to tax and
                                               contribution payment
                                                                                      Enforcement of law by
                                                                                            the state

                                               Statistical, accounting,
                                              registration, notification
                                                                                      Protection of property,
                                                     obligations
                                                                                       with special attention
                                                                                     to protecting intellectual
                                                                                               rights
                                             Regulatory environment of
                                              the electronic economy

                                                                                    Rules of alternative debate
                                                                                        settlement forms



                                                                                        Strengthening the
                                                                                      protection of creditors



                                                                                       Market surveillance


            Pillars
                                                                                      Combating corruption
            Cornerstone factors

            Specific factors




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Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                             11.


                               areas of intervention – financing


  Regulation specifying
                                                               Development of          Development of
     the operating                  2. Access
                                                               entrepreneurial         entrepreneurial
     conditions of                 to financing
                                                                 knowledge              infrastructure
      enterprises




    Promoting SMEs’             Facilitating SMEs’            Facilitating SMEs’       Buyer–supplier
      accumulation               access to credit              access to capital         relations
     of own sources

                                  Development of             Extending the range     Strengthening SMEs’
   Granting aid in order       higher financing risk             of diversified       bargaining position
    to facilitate SMEs’           credit products            investment products       by regulation and
       accumulation            for SMEs, extension           aimed at SMEs, with     information provision
                                  of the range of             special attention to
                                 diversified credit            seed and start-up
                                     products                 SMEs and SMEs in
     Development of                                                                     Managing the
                                                              their growth phase
    SMEs’ investment                                                                 problem of gridlocks
        attitude
                                 Improving SMEs’
                               financial awareness
                                                                                      Strengthening the
                                                                                     payment discipline of
                                                                                          the state



                                                                                         Management
                                                                                          of claims




         Pillars

         Cornerstone factors

         Specific factors




                                                       125
11.                                                 APPENDIX




                            areas of intervention – entrepreneurial knowledge


      Regulation specifying
                                                                   3. Development                 Development of
         the operating
                                    Access to financing           of entrepreneurial              entrepreneurial
         conditions of
                                                                      knowledge                    infrastructure
          enterprises




         Internal factors            External factors              Improper (profes-            Entrepreneural skills
          of enterprise               of enterprise               sional) education of
          management                  management                      labour force

                                                                                                 Studies necessary
                                    Provision of proper                                            for enterprise
      Teaching management                                            Development of
                                   access to information                                              start-up
      studies for enterprises                                         general skills
       already in the market                                         (e.g. language,
                                                                   financial, e-skills)
                                       Efficiency of                                               Development of
                                    supported training,                                          innovative, social-
        Teaching manage-
                                       consultancy                                                and environment-
       ment and leadership                                         Development of
                                         services                                                conscious attitude
         studies in school                                       employees’ vocational
        system education                                              knowledge

                                                                                                  Linking technical
                                                                                                   education with
        Vocational studies                                                                        business studies



       Use of corporate-,
        quality-, environ-
       mental- and other
      management systems




          Improving the
        efficiency of inter-
        company relations
        and the conditions
         of organisation




          Assisting the
        exploitation of the
       results of scientific
            research
                                                                          Pillars

                                                                          Cornerstone factors

                                                                          Specific factors




                                                           126
Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                               11.

                   areas of intervention – entrepreneurial infrastructure


  Regulation specifying
                                                              Development of               4. Development
     the operating
                                  Access to financing         entrepreneurial             of entrepreneurial
     conditions of
                                                                knowledge                   infrastructure
      enterprises




                    Development of business and
                                                              Development of ICT infrastructure
                        R&D infrastructure



                    Development of infrastructure                  Access to ICT network
                  within incubator houses, industrial                  infrastructure,
                  parks and industrial branches and                 broadband networks
                          the related services

                                                                 Informatisation of corporate
                                                                          processes
                       Capacity development of
                   technology centre networks and
                   institutional, network structures
                      linking R&D institutes and
                              enterprises




        Pillars

        Cornerstone factors

        Specific factors




                                                        127
11.                                                       APPENDIX




      11.4. Set of objectives for the small and medium-sized enterprise development strategy



                                                        Increasing SMEs’s economic performance




                       Elaboration of a supportive regulative
                                                                                                            Extension of financing resources
                                   environment




            Competitive                                  Strengthening of economic and                                Increasing
                                     Decreasing                                               Extending the
           share of public                               legal security, fair competition                          the accumulation
                                    administrative                                           range of higher
              burden                                                                          financing risk            of SMEs
                                       burdens
                                    resulting from                                               products
                                                             Improving the quality of
                                   state regulation
                                                            regulation, elaborating of
            Decreasing                                         efficiency analysis
              income                                                                            Extending
           centralisation                                                                      the offer of
                                     Simplify the
                                                          Better information dissemi-        diversified loan
                                  criteria of market
                                                          nation to economic players            products
                                       entrance
             Extending                                                                        available for
              circle of                                                                           SMEs
             taxpayers                                      Improving the conditions
                                     Decrease                 for law enforcement
                                   administrative                                                Extending
                                  burdens relating                                              the offer of
                                    to operation             Assisting the spread of
                                                          alternative concilation forms         diversified
                                                                                               investment
                                                                                                 products
                                                          Strengthening the protection         available for
                                    Develop the                                              SMEs, including
                                                          of property especially that of
                                     regulatory                                               investment in
                                                              intellectual property
                                    environment                                               SMEs in their
                                    of electronic                                           seed, start-up and
                                      economy             Strengthening the protection       growth phases
                                                                  of creditors


                                                            Strengthening of market
                                                         surveillance and control system


                                                                Cutting back corruption


                                                          Improving payment discipline




                             Increasing productivity                                               Expanding employment




                                                                   12
        Strategy for the Development of Small and Medium-sized Enterprises
                                                                                                                                11.




                                    Development of entrepreneurial                       Development of entrepreneurial
                                            knowledge                                           infrastructure




                                                      Development of                  Development of        Development of
 Improvement of           Extending the
                                                    entrepreneurial skills           business and R&D      ICT infrastructure
 SMEs’ Liquidity           knowledge of
                          entrepreneurs                                                infrastructure           and use
                          and employees
                                                   Disseminate knowledge
  Strengthening                                   essential for launching an
                                                         enterprise                     Expanding the        Improve access
  of the state’s            Disseminate                                               infrastructure of       to ITC network
payment discipline           knowledge                                               incubator houses         infrastructure
                            essential for                                               and industrial        and broadband
                            operating an         Bettering utilisation of the        parks, developing           networks
                             enterprise        results of scientific research in          integrated
 More efficient
                             (financial,         the entrepreneurial sphere                services
    claim
                            management,                                                (site + business
 management
                              language,                                                    services)          Increase the
                               ICT e.c.t)                                                                   informatisation
                                                   Supplement technical
                                                                                                            of corporate and
                                                  education with teaching
                                                                                                             inter-company
                                                     business studies
                            Renewal of                                                                          processes,
                                                                                       Boosting the
                            vocational                                                                         furthermore
                                                                                      capacity of R&D
                             education                                                                       the processes
                                                      Strengthening of                and technology
                          bearing in mind                                                                        between
                                                    entrepreneurial spirit                transfer
                          the demands of                                                                     companies and
                                                                                        institutions
                             economy                                                                           government

                                                Corporate Social Responsibility
                                                  (CSR) and the developing              Increasing
                                                 environmentally conscious              of logistics
       Strategic target                                    attitude                     capacities

       Pillars

       Cornerstone targets

       Specific targets

       Horizontal targets




                                                                                   More efficient inter-company
       Integration into global economy
                                                                                           cooperation




                                                                     129
Issued by the Ministry of Economy and Transport
     H–1055 Budapest, Honvéd utca 13–15.
               www.gkm.gov.hu

     Manuscript closed on December, 2007
www.gkm.gov.hu

								
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