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Increasing the Defense Industrial Base in Hungary

For generations, Hungary has been regarded as a ”In the current situation the Hungarian Defence Forces
nation full of innovation and scientific are not capable of responding to the challenges of the
21st century and they would not be capable of
development. However, since the 1950’s, the resisting a contingent military threat.” – Csaba Hende
majority of Hungary’s famous scientists and
inventors have conducted their research outside of Hungary and Hungary has not financially
benefitted from their work.

The defense industrial market is no exception. Hungary has the potential to become a Center of
Excellence within Europe for defense research, development, test, and evaluation (RDT&E).

As Hungary looks for ways to increase defense spending, equip its soldiers to meet the threats
of the 21st century, implement a strong national security policy, and increase its national Gross
Domestic Product (GDP), opportunities exist which allow Hungary to leverage its most
valuable national resource (its intelligence) whilst drawing outside investment.

The following white paper gives an overview of one concept to create a defense-focused center
to promote economic development while positioning Hungary as a center of excellence for the
defense industry and enticing businesses to relocate to Hungary. This is a proven concept that
offers a significant and sustainable return on investment (ROI).

A Hungarian Military and Security Business Accelerator and Laboratory

“Fostering the rapid development of defense and security technology solutions to meet military
need and private industry demands.”

Background.

In 2007, Technical Applications Group The key component to this methodology is the business
accelerator whose mission is to assist entrepreneurs and
worked with a U.S. State created a defense innovators with developing new business and dual use
and security technology accelerator as well technologies, in a rapid 8-18 month timeline, focused on both
military and commercial needs in the areas of defense, security
as a technology lab, similar to the program and intelligence.
being proposed for Hungary.
The accelerator provides low-cost office space, subject matter
experts, and business guidance to small companies offering
In its first 2 years, the non-profit program defense and security-related services and/or products. The
received over USD $9M in grants and accelerator draws businesses from outside of the state and
ensures that revenue generated stays in the state.
government funds and generated 157 jobs,
which lead to $36.5M in revenue for the state. This funding was from the U.S. military, the
state, and the federal (national) government. Each job created cost USD $57,325, which is high
by most standards, however, the jobs created were highly technical, attracted very experienced
professionals with unique skillsets, and the average salary paid was over USD $120,000 per
year. The state continued to generate taxable revenue on high salary positions.

Since 2009, an additional 298 jobs have been created at an average cost of USD $14,678; these
jobs are identical in that they are highly technical and well-paying. Also, an additional USD
$137.5M has been created in state revenue. Therefore, in less than four years, 455 highly-
technical, high-paying defense and security-specific jobs have been created and the state has

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made USD $174M on an investment by the state of only USD $3M. This does not include
indirect job creation, those jobs created by suppliers as a result to demand created by the
program.

Initially, the question was asked, “If the state has so many military bases, why is none of the
defense spending staying in the state?” A similar situation exists in Hungary. Hungary has its
own military, yet none of the products or services it procures are from Hungarian firms.
Maybe the contract is issued to a Hungarian firm; however, those local firms are then procuring
products from the United States, Germany, France, the UK, etc. The bulk of the value of the
contract is actually leaving Hungary.

Therefore, the potential jobs created (economic development) by Hungarian MoD acquisitions
are going to another country; much of the taxable revenue is going to another country. In fact,
this required action essentially hurts the Hungarian economy and reduces its true GDP. While
it is possible to use defense offsets to reduce the economic damage these types of acquisitions
create, that is an offset on paper - not real - and offers no economic benefit to the country.

Overview.

The purpose of this program is to create an innovative focal point designed to foster
collaboration between the military and intelligence community, universities, entrepreneurs,
and private sector businesses. The program is engineered to develop solutions to problems
and capability gaps identified by the military, as well as to commercialize dual-use
technologies within 8-18 months. These are technologies developed specifically for military
use, military technologies that could be turned into commercial solutions, or commercial
technologies that could be adapted to military use. A company enters the program and within
two years, should be at a mature level.

The program attracts small businesses, as


well as developed businesses, which are
looking to enter the defense market or
turn their innovations into solutions, not
science projects needing millions of dollars
and years of research and development
(R&D). In return for business training,
subject matter expertise, sales and
marketing opportunities, and assistance
with defense-specific requirements, these
businesses move their firms to the
required region and promise to create jobs,
all of which promote economic
Figure 1 - Example of Similar Program in the U.S. development.

As a government-funded non-profit organization, this facility is focused solely on promoting


economic development by supporting RDT&E, education, and programs, which have
applications within the defense and security sectors. More importantly, as a government
funded non-profit, opportunities for corruption are eliminated. This is an open, neutral,
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transparent program, designed to create jobs and generate revenue for the companies involved
and for the state. It is run by a third party - not party affiliated - in order to have credibility and
legitimacy.

The organization also collaborates with educational institutions, other non-profit


organizations, NGOs, and multi-national organizations by encouraging the development of
technology. This promotes opportunities for university involvement, peer review, and
publication, as well.

This type of program lessens the burden of the government, but most importantly
exponentially increases economic development by attracting not only local, SME businesses,
but also SME’s from other states, as well as larger firms looking to enter the defense and
security market.

In Hungary.

Hungary is perfectly suited for a program similar to the one described above. The intent would
be twofold: (1) create an MoD/government-funded non-profit organization focused on
economic development via a business accelerator and (2) create a government-funded test
facility to focus on military RDT&E (this could be a test facility leveraged by Hungary, its
partners, NATO, and the EDA).

While this type of program is atypical for Hungary - and the MoD has not invested in programs
like this in the past - the small investment required assists MoD leadership, as well as the new
government, meet their collective requirements: increase GDP, increase defense spending,
save money, create jobs, focus on national development, provide a national security strategy,
regain credibility within the region (and with its allies), strengthen its regional influence,
rebuild its national pride, and remove corruption.

There are many small firms in Hungary who have valuable


“Inadequate equipment and training, but
ideas, products, and services that cannot be brought to
most importantly, a moral crisis shook the
army and the ministry.” – Csaba Hende
market purely due to economic reasons and because the
previous military regime had no interest in innovation outside of their sphere of corruption.
Furthermore, these firms have no idea how to get their products and services to key decision
makers within the government and military because the tender process is so complicated and
corrupt. The most likely culprit though, is that these business owners, inventors, scientists,
and entrepreneurs do not understand how business really works or how to generate
sustainable, long-term revenue.

This project would create an entry point, providing access to funding, contacts within the
military in Hungary, contacts outside of Hungary, all while being located in a professional
business environment. In the past, the Hungarian government and organizations like ITD-H
have spent billions of Forints in an attempt to entice large factories to relocate or expand to
Hungary. Common economic principles, history, and the current global economic climate show
that this is the wrong process. Not only is this a very expensive process, but it is shortsighted
and offers no long-term ROI. Success comes from initially linking local entrepreneurs,
inventors, nonprofits, communities and existing businesses with helpful expertise and financial

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resources. Most jobs are created from the SME sector, not the Global 500. And reports also
show that larger, successful firms made great strides in the beginning, when classified as an
SME, because they had business guidance in addition to financial support.

As a simple example, if you ask ten different Hungarian business owners for a business plan or
strategy, statistically, five of these owners will have no idea what you are talking about. The
other five will present random documents that have no similarity and most likely fail to answer
the basic questions business plans address. Conversely, if you ask ten Germans for business
plans, while the content will be different, each document will give specific answers to specific
questions and will be in the same format. This simple fundamental difference demonstrates
how Hungarian small businesses have potential, but need business guidance and expertise,
especially when dealing with military and security technologies and products.

The funding for this program would initially come from the Hungarian MoD, the local
government, or potentially from the national government however, future and additional funds
could come from the European Union, EDA, NATO, and even other countries. This would drive
business to Hungary, creating a defense industrial base and increasing GDP.

From inception, this project could be up-and-running in as little as 12 months. Within another
12 months, the program will have created jobs for Hungarians and helped grow Hungarian
business. Initial costs are low and, most importantly, this is a program that has worked with
success in other places. Due to the current economic climate in Hungary, finding companies to
enter the program would be no challenge. In the last 18 months, we have been introduced to
over 20 Hungarian firms who have innovative technology that would like nothing more than
involvement in a program like this.

Because the program has two components (an accelerator for businesses and a lab/test facility
for technologies), you have two potential revenue sources from one program. While the
accelerator is developing opportunities for local businesses, the military can leverage the lab
for testing. The lab can also be used by other businesses and other government agencies, not
just inside Hungary, but from other nations, to include NATO and the EDA.

Technical Applications Group and its sister company, Kör-Tér-Terv Kft, have experience in
setting up and running a program like this, as well as the necessary contacts within the US
government and military, NATO, and European Union to see that the program is supported, not
just financially, but politically.

If the Hungarian government wants to help For Further Information:


its SME businesses, a program like this is an
ideal way to do that. For a thorough plan of Technical Applications Group LLC
action and further detailed information, Kör-Tér-Terv Kft
please contact us. info@techappsgroup.org
www.techappsgroup.org

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