We refer to your letter of 15 March, 2007 regarding the Trade & Industry Committee's inquiry into the impact of the "new" EU Member States on UK business.

  As requested, we have drawn the inquiry to the attention of a few non-governmental organisations in Hungary including the British Chamber of Commerce in Hungary (BCCH), the Confederation of Hungarian Industries (MGyOSZ) and the Hungarian Chamber of Commerce (MKIK) which may have sent their views to the Committee in the meantime directly.

  As for particular aspects of business relationships between the UK and Hungary — for example, areas in which our Government feels there could be substantial benefit from greater trade or closer business ties or co-operation in R&D—we have also consulted with various government agencies including ITDH, the Hungarian government's investment and trade development agency and NKTH, the agency responsible for research and technology.

  We shall be pleased to discuss these views during the Committee hearing today but we have felt it useful to summarise the key points also in writing here, for ease of reference along the lines of your questions as listed in your letter.

Is the UK exploiting the opportunities offered by the accession of these countries to the EU?

—  It was not the accession date in 2004 that brought a breakthrough in British-Hungarian trade relations. Trade turnover had significantly increased since the early nineties when a) administrative trade barriers were gradually abolished after Hungary had signed the Europe Agreement; b) several British companies set up companies in Hungary and started business activities.

  Britain's trade with some Central European countries are shown in the following table.

	Poland		Czech Rep		Hungary
	Export	Import	Export	Import	Export	Import
2002	1,318	1,265	1,031	1,250	750	846
2003	1,462	1,545	1,003	1,412	856	1,120
2004	1,413	1,834	975	1,291	933	1,579
2005	1,653	2,318	1,080	1,883	834	1,859
2006	2,806	4,093	1,581	2,575	858	2,102

  As shown, whilst Britain's import from these countries grew considerably, its export growth lagged behind.

  Britain's modest export performance may be the result of a combination of several factors including:

—  Central Europe is still considered as a remote and "exotic" area for British business;

—  the lack of a British retail bank in the region;

—  the lack of "perseverance" of British SMEs: slow response from potential business partners (often caused by language difficulties) or if there are no immediate business results after initial contacts no further efforts are made; and

—  it seems, UKTI's priority areas currently include other strategic regions and fewer trade promotional instruments are offered to British SMEs wishing to do business in the Central European region.

  As far as British investments are concerned we have found that these represent about 6% of total Hungarian FDI stock. We believe that this share could be significantly increased if the benefits Hungary offers to foreign investors could be made widely known in the UK. We recognize the important role UKTI and other British institutions may play in this process.

What are the most promising areas for developing business? Is there potential for exporting more goods and services to these countries?

  Considering the open nature of the Hungarian economy there is a permanent need for imports of a very wide range of products. British companies, products and services enjoy a generally favourable reputation.

  British companies should look at Central Europe as a region and not as a bunch of small, ethnically divided states. With the accession of Romania and Bulgaria this is a market of about 100 million people with huge potentials particularly in the following areas:

—  Selling and buying goods and services: biotech, ITC, automotive, electronics, quality merchandise;

—  Subcontracting, outsourcing: engineering, contract research, prototypes, small series production, high value added products, software development;

—  Logistics operations: distribution centres, warehousing, transport facilities;

—  Shared services centres: regional corporate headquarters, call centres, back-office services;

—  PPP/PFI initiatives: roads, water, sewage, waste management, urban and industrial regeneration, alternative energy utilisation; and

—  Property development: housing, tourism facilities, airports, health & care facilities.

Where may the UK be losing out to competitors?

  For a neutral observer it may seem that governments of some other EU15 countries provide a more effective and consistent assistance to their SMEs to perform at these very competitive markets, where prices often override other conditions.

  British companies are quite ignorant of the enormous opportunities offered by public procurement tenders and, as pointed out earlier, need more perseverance in their marketing activities.

What advantage might the UK draw from the existence of the skilled workforce in these countries?

  Production costs in the UK are increasing in spite of the influx of skilled labour from Poland and other Central European countries. By relocating certain high value-added activities such as contract research, prototype and tool making, small series production, etc. to Hungary, UK companies could maintain the high standards required while keeping production costs at a competitive level.

Is there scope for the UK's educational establishments and businesses to build relationships with students and educational institutions in Eastern Europe? How could the UK and these countries pool their scientific and technical know-how to reap the maximum benefit for all concerned?

  British educational institutions have already established excellent partnership with their Hungarian counterparts in many areas.

  As mentioned earlier, using Hungarian facilities and skilled workforce in joint research, development and innovation programmes eg in biotechnology, ICT and material sciences could reap high benefits for the UK. British companies should gain encouragement from good examples in life sciences including AstraZeneca conducting and coordinating all clinical trials in the Central-Eastern European region from Hungary, or GlaxoSmithKline investing in a large vaccine production plant and associated research and development.

What are the advantages and disadvantages of doing business there? Is it still easier to operate in western than in eastern Europe; and, if so, why? What barriers exist?

  Hungary's main attractions for foreign business are her central geographical location and the advanced logistics infrastructure with EU-defined transport corridors which enable the country to serve as a trade post and logistical hub for the entire Central, Eastern and Southern European region. These characteristics coupled with high educational standards and competitive labour costs, and the traditional creativity and resourcefulness of Hungarians have made the country one of the favourite business locations in Europe.

  The Hungarian legal framework provides a secure climate for business and guarantees the full repatriation of profits. Hungarian intellectual property laws are now harmonised with the EU and also apply product patent, Supplementary Protection Certificate (SPC) and Data Exclusivity (DE) which were long-standing issues especially in the pharmaceutical industry.

  The Hungarian government is well aware of the difficulties foreign businesses may face when running a business in Hungary and intends to introduce a series of measures to simplify business procedures.

  We trust these answers, together with our verbal contributions, plus the findings of the Committee's forthcoming visit to Hungary will provide a clear and comprehensive view on the prospects of British-Hungarian business relations for the inquiry.

19 June 2007