Subcontracting and Outward Processing Trade as a Form of Networking in Hungary

Szanyi, M. (2002) Subcontracting and Outward Processing Trade as a Form of Networking in Hungary. Acta Oeconomica, 52 (3). pp. 347-369. ISSN 0001-6373

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Abstract

In international business practice, subcontracting is an unbalanced form of co-operation. It can bring serious negative effects for partners from less developed countries because of the strong one-sided dependence on the “developed” partner. International experience, e.g. in the maquiladora region suggests that degradation of corporate activities, low profitability, technological dependence, loss of own production and shrinking market presence of own products may characterise many firms, and even whole industries or regions. These firms, regions and industries often become isolated from the national economy. Therefore, potential positive modernisation effects may also be “locked” in the subcontracting firm not spreading in the economy. Hungarian experience with subcontracting was somewhat different already in the 1970s and 1980s. Companies concluded subcontracts with more developed Western partners in order to gain access to up-to-date technology and know-how, new markets and new products. Many of them incorporated the acquired knowledge with success. During the 1990s subcontracting was the driving force of corporate modernisation, since former development sources (primarily state subsidies) dried up. Many firms chose the new option of adjustment strategy. The efforts of Hungarian companies to integrate into the international division of labour coincided with the substantial change of subcontracting deals on world markets. Subcontracting became a form of outsourcing and changed to a long-term, network-type of co-operation form with considerable knowledge transfer. This study presents the results of an empirical survey. The Department of Business Economics of the Budapest University of Economics and Public Administration carried out two rounds of interviews in more than 300 companies both in 1996 and 1999. The survey revealed some new features of international subcontracting patterns and found some evidence of modernisation impacts subcontracting has on Hungarian corporate strategies.

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