Michael Pammer, Johannes Kepler UniversitŠt, Linz

The history of Austrian investment in Hungary is an example of the critical role of institutions in the development of a backward economy in the late nineteenth century. Austrians were ready to provide a major part of the foreign capital that Hungary needed for its industrialization, but, lacking insight into the situation of the Hungarian market, they were reluctant to invest directly in Hungary's industry. Public investment and industrial promotion by the Hungarian state and investment by Hungarian banks became the instruments to direct foreign capital to the Hungarian industry. Data from probate inventories allow an insight into this process at the level of single households. Since these inventories include detailed lists of securities, we can distinguish between different kinds of investment and different types of investors. The main finding concerning Austrian investment behavior toward Hungary is the dominant role of investment in institutional securities such as state bonds and bank securities; the only other sector of the Hungarian economy that was invested in directly was the transport system. Papers of the manufacturing sector did not attract the interest of most Austrian investors. Only few Austrians held Hungarian industrial securities, but those who did so invested comparably large sums. The demand for institutional papers and railroad securities depended on different factors: while state bonds and banking securities comprised a steadily rising proportion in the portfolios of Austrian investors, railroad securities did not show such a pattern. Investment in railroad depended rather on the performance of the Hungarian economy as reflected in the growth rates of the Hungarian industrial production; this factor was not relevant for investment in institutional papers. Apart from acquiring funds that could not be provided by the domestic market without a backlash on the capital supply in the private sector, the institutional intermediaries between foreign investors and the Hungarian industry thus constituted an element of stability in the Hungarian economy. Austrian investment in institutional securities proved to be not particularly sensitive to fluctuations in the development of the Hungarian economy, while direct investment would probably have been much more sensitive to the ups and downs in the process of industrial growth. The transfer of Austrian savings to Hungary is an example of how a backward region of the nineteenth century profited from its integration within a large financial market. The economic integration into the Habsburg Empire offered additional advantages to the Hungarian economy apart from the integration of the European financial market as a whole. The heterogenous structure of the Austro-Hungarian economy, which at the same time included crown-lands at a level of development similar to western Europe and some of the most backward regions of Europe, seems to have worked in favor of the latecomers. A precondition for that was the pursuit of an active economic policy by the state and the establishment of an efficient financial system that offered the opportunity of stable and calculable investment to private wealth holders.