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Synovate in Hungary A hub for Hungary, Czech Republic and Slovakia  Office established in 1991  Around 40 full-time staff, 15 researchers  58,140 interviews, 395 focus groups and in-depth interviews in 2005  Regional coordinating centre for Central Europe

Business Climate Barometer Joint Survey of The BCCH & Synovate

Form  online and self administered survey  single interview lasted approx min. Respondents  senior management of foreign companies investing in Hungary industries like agriculture, tobacco, construction, business services, education, food & beverages, automotive, trade, real estate, communications, finance and hotels Timing  Interviews were conducted between September 25 – October 16, 2006 Methodology

Investors are rather negative towards the prevailing business environment in Hungary in the near future. * Average score on the scale , where -100 means definitely less favourable, 0 means the same as today, and +100 means definitely more favourable Q Oct Definitely less favourable Definitely more favourable Expectations towards business environment

The negative sentiment is widespread, but particularly strong amongst large enterprises. Q1 Definitely less favourable Definitely more favourable TotalSmall BusinessMid-size BusinessLarge Business * Average score on the scale , where -100 means definitely less favourable, 0 means the same as today, and +100 means definitely more favourable Expectations towards business environment

The construction/real estate and manufacturing/trade sectors were the most pessimistic sectors in the economy. Q1 Definitely less favourable Definitely more favourable Total Manufacturing, Trade Construction, Real Estate Other Financial services Professional Services * Average score on the scale , where -100 means definitely less favourable, 0 means the same as today, and +100 means definitely more favourable

Government’s performance in supporting investors Q2 * Average score on the scale , where -100 means making things much worse, 0 means neither better nor worse and 100 means making things much better The Government is not seen as taking positive steps to improve the business environment. In fact, opinion is that it is making things worse! Making things much worse Making things much better Oct

Government’s performance in supporting investors Once again, large companies are the most negative regarding the Government’s recent performance for improving the business environment. Q2 Making things much better Total Small BusinessMid-size BusinessLarge Business Making things much worse * Average score on the scale , where -100 means making things much worse, 0 means neither better nor worse and 100 means making things much better

Government’s performance in supporting investors Although the manufacturing/trade firms had shown pessimism about the business environment, its clear that they don’t blame the Government for it. However, the construction/real estate sectors strongly believe that the Government is making things worse. Q2 Total Manufacturing, Trade Construction, Real Estate Other Financial services Professional Services Making things much better Making things much worse * Average score on the scale , where -100 means making things much worse, 0 means neither better nor worse and 100 means making things much better

Impact of Gyurcsány restrictive package Investors formed the same opinion about Hungary’s competitiveness in terms of the Gyurcsány restrictive package as for the government's performance, with large companies being the most negative. * Average score on the scale , where -100 means much less competitive, 0 means neither better nor worse and 100 means much more competitive Q3 Much less competitive Much more competitive Average Small BusinessMid-size BusinessLarge Business

Impact of Gyurcsány restrictive package All sectors were rather pessimistic regarding the Gyurcsány restrictive package. Q3 Average Manufacturing, Trade Construction, Real Estate Other Financial services Professional Services Much less competitive Much more competitive * Average score on the scale , where -100 means much less competitive, 0 means neither better nor worse and 100 means much more competitive

Q4 Impact of Gyurcsány restrictive package Plan any reduction in staff work force Plan to revise staff benefit package It is clear that the Gyurcsány restrictive package will definitely have an impact on both staff levels as well as on staff benefit packages. In fact, 1 in 5 companies will reduce their number of staff, whilst almost 2 in 5 will revise staff benefits. There is also a sizeable number of companies that have not yet made a decision. Q5Q5

Operating sector’s dynamism Over the next 2-3 years, most companies do not see any change in the dynamism of the sector that they are operating in. However, in line with other perceptions, large companies are the most pessimistic. Q7 Average Small BusinessMid-size BusinessLarge Business Much less dynamic Much more dynamic * Average score on the scale , where -100 means much less dynamic, 0 means neither better nor worse and 100 means much more dynamic

Operating sector’s dynamism Companies both in the construction/real estate and manufacturing/trade sectors are the most pessimistic over their sector’s dynamism over the next 2-3 years. Q7 Average Manufacturing, Trade Construction, Real Estate Other Financial services Professional Services Much less dynamic Much more dynamic * Average score on the scale , where -100 means much less dynamic, 0 means neither better nor worse and 100 means much more dynamic

Barriers to business growth Q8 Average May 2004 October 2006 Over the past 2 years, bureaucracy and corruption have become bigger threats to business activity in Hungary. Interestingly, shortage of skilled staff is less of an issue! However, the size of the internal market has become a more decisive point. In relative scores: 1 = totally insignificant 3 = significant 5 = extremely significant

Q12 % Average Most frequently mentioned points when making a decision on new / further investments

Q12 % Average Most important points when making a decision on new / further investments

Anticipation of any unexpected change Q19 43% of those interviewed believe that there will be some unexpected changes in the next 6 months regarding the economy or its legal regulations.

Neither significant nor insignificant Extremely significant Totally insignificant Significance of source of information about business environment Business organisations Other companies investing in Hungary International media Government offices Relatives/ friends Hungarian media The 2 most important sources of information about the business environment appeared to be the business organisations and other companies investing in Hungary. Q20

Much worse Much better EU Effect on Hungarian economy Financing options Infrastructure EU Overall Quality of public services Employment policies Regulation policies Return on Investment Human resources Corruption Bureaucracy Competition Prices / expenses Taxation Several issues have improved with Hungary’s accession to the European Union, particularly infrastructure and financing options. However, competition, taxation and prices have deteriorated. Q21

Analysis of Critical Business Drivers

Preferred Countries for Investment in Central/ Eastern European Q16

LEGAL ENVIRONMENT Efficient administration Simple procedures/ no bureaucracy Just/impartial judicial system No corruption ECONOMIC ENVIRONMENT High internal demand Transparent information on the business environment High quality of management Well developed infrastructure Well developed financial sector Low costs of finance Business Drivers ATTITUDE TO FOREIGNERS Foreigners are treated equally Benefits for foreign investors

Business Drivers in Order of Importance Most important Least important

High Medium Low STANDARDISED PERFORMANCE WeakAverageStrong DISCRIMINATORS Strategic Matrix – Hungary

Key findings (1) Expectations towards the business environment appear to be fairly pessimistic and there is quite a decrease versus sentiments expressed when the survey was first launched 2 years ago. Opinion on the government's policies toward improving the business environment has also become more pessimistic compared to the previous waves. Opinion on the Gyurcsány restrictive package is also negative. The most important barrier to business growth is „ Bureaucracy and red tape” followed by „Corruption”. The third biggest factor is “High cost of finance”. Taxation rules, unpredictable political steps and lack of purchasing power are mentioned as other important factors hindering business growth.

Key findings (2) Political predictability, fair taxation rules and lower bureaucracy are mentioned as top priorities in improving the attractiveness of Hungary for investment. Participants agree that EU membership had positive effects on the Hungarian economy especially in terms of financing options, infrastructure and quality of public services. EU membership had less positive effect as expected in terms of EU regulations, higher prices/expenses and new competition. Hungary is perceived strong in terms of having a well developed financial sector but week in terms of offering benefits for foreign investors and having high internal demand. There is room for improvement in terms of transparency of the business environment and equal treatment of foreigners which are also important drivers for future investment.

Questions

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