Foreign penetration of Hungarian manufacturing increased rapidly in the 1990s. The share of the total capital of foreign investment enterprises (FIEs) in the nominal capital of the sector was 72.5 per cent in 1999 (as opposed to 57.9 per cent in the whole economy). The manufacturing industries in which the foreign penetration is highest are motor vehicles, office machinery, tobacco, non-metallic minerals, and telecommunications equipment.

The share accounted for by FIEs is also remarkable in other respects: Their share of manufacturing employment increased from 31.6 per cent in 1993 to 46.5 per cent in 1999. (Although this was a smaller increase than in the share of nominal capital, investment or exports, it was the highest of any country in the Central and Eastern European [CEE] region.) The FIEs also had a determining role in 1999 in net sales revenue (71.8 per cent) and exports (88.6 per cent). In 1995, FIEs were producing 58 per cent of the value added in manufacturing, and in 1999, 71 per cent.

The rapidly increasing presence of foreign capital and activity of FIEs in the 1990s contributed to some important structural changes in Hungarian manufacturing. The production volume of manufacturing recovered quite quickly after the trough of depression was reached in 1992. The impetus behind the growth came from machinery, with a 400 per cent production increase and the establishment of new production cultures. The development was induced by FIEs, especially multinational affiliates in the carcomponent, electronics and office-machinery industries. As a consequence, the production share of the so called hightechnology branches of manufacturing increased considerably.

International experience in developed and developing countries shows that foreign affiliates are generally more efficient and profitable than domestic companies. (Previous research has shown that this applies equally to the CEE countries and Hungary is no exception.) The differences between the two groups derive from several factors, such as ownership and the internationalization advantages of multinationals, bigger capital endowments, better organization, international contacts, etc. In Hungary there was little difference in profitability between domestic firms and FIEs until 1995. The bulk of the latter made trading losses, due to the costs of establishing production capacities. Since 1996, pre-tax profits have been sharply increasing at FIEs, which now produce 66 per cent of the profits of all companies in the economy.