BUDAPEST -- Hungary, the favorite destination of foreign capital in East Europe for years, maintained its lead in 1994 despite a slowdown in privatizations, expatriate businessmen and analysts said.


Investments are pouring in relentlessly because the country, which was the first to institute market reforms in the 1980s, still has the most open economy and most progressive business legislation in the region, they explained.


"Hungary's set of rules and regulations are relatively very advanced," said David Young, director of the accounting firm Price Waterhouse Hungary. "Its people think in a business way, more than in other (East European) countries." According to preliminary figures, Hungary attracted $926 million in foreign investments in the first nine months of 1994. Government officials said they expected that figure to grow to $1.2 billion by the year-end.


By comparison, Poland was expected to bring in $800 million in foreign capital last year and Romania $627 million. For Russia and the Czech Republic, figures were only available for the first nine months of 1994, during which they registered direct investments of $768 million and $478 million, respectively.


Hungary's margin of lead in 1994 was far smaller than in the first four post-communist years, when the country took a total of $7 billion, more than half of all the outside money pouring into the region.


Still, the fact that this state of only 10 million, one of the region's smaller entities, beat out countries with many times more potential consumers is remarkable, said economist Laszlo Csaba.


Writing in the weekly Figyelo business magazine, Csaba said Hungarian laws are the most business-friendly in the region.


"Uniquely among the countries in transition," he wrote, "Hungary has Western European financial, accounting and banking laws in force."


Hungary is also the only country in the region with an effective bankruptcy law, he added.


The country is still reaping the benefits of the fact that it had a relatively mild form of communism, which allowed private businesses to exist, Price Waterhouse's Young said.


"Because of the liberal policies in the early '80s, thousands of private businesses were formed and people gained experience in running businesses," he said. "That's 10 extra years of private enterprise for Hungary (compared to the region's other states), which is still paying off."


But while the private sector is strong, the transfer of state-owned businesses into it is slowing, investors warn.


Privatizations slowed in 1994 because of political uncertainty before and just after the May parliamentary elections in which the conservative government was replaced by a Socialist-led coalition, they said.


According to the privatization agencies, foreigners paid only about 10 billion forints ($90 million) for state-owned businesses in the first 10 months of 1994, compared to 113 billion forints during the whole of 1993. And the uncertainty only increased after Prime Minister Gyula Horn vetoed the already completed sale of a hotel chain last month, a move investors widely criticized as political interference into a business decision.


"I think stepping in at the last minute was unfortunate because it made the business environment less certain than it already was," Young said.


But investments in Hungary are less and less dependent on privatizations, Csaba said. Greenfield investments, in which companies set up local businesses instead of buying them, are gaining strength, he wrote.


But while Hungary will likely remain the darling of Western businesses, its larger neighbors will sooner or later be too attractive to be spurned, said Robert Jackson, area vice president for Pepsico International.


"People who look at the region often find Hungary the most attractive place to do business," he said. "But once they are established, they'll ask 'How can I expand?' and they will be looking at other countries, too."