7th Global Conference on Business & Economics

ISBN : 978-0-9742114-9-7

Country Risk And Its Impact On Foreign Direct Investment Decision Making Process: A Bulgarian Perspective

Miroslav Mateev Professor of Finance American University in Bulgaria
Phone: +359 73 888 440, Е-mail: mmateev@aubg.bg

Ivan Stoyanov Financial analyst MKB Unionbank, Bulgaria
Phone: +359 02 915 3337, Е-mail: stoianovi@unionbank.bg

October 13-14, 2007 Rome, Italy

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7th Global Conference on Business & Economics

ISBN : 978-0-9742114-9-7

Country Risk And Its Impact On Foreign Direct Investment Decision Making Process: A Bulgarian Perspective

ABSTRACT
This paper examines the impact of country risk on Foreign Direct Investment /FDI/ inflows in Bulgaria. The paper attempts to answer the question: How important is actually country risk and to what degree it may impact foreign investment decisions? Based on a comprehensive analysis of the FDI inflows in Bulgaria for the period 1992 – 2006 the paper proves that foreign direct investment are of crucial importance to the process of transition from a planned to a market economy for the Central and Eastern European (CEE) countries in the global marketplace. Using the research data from a survey of 132 foreign companies invested in Bulgaria during that period we evaluate the specific impact of different country risk components on FDI decision making process from a Bulgarian perspective. Factors such as type of investment, cost of entry mode, opportunities and risks arising from the investment and overall business climate play a decisive role in the company’s strategy to enter a foreign country. In compliance with other similar researches we find that market size, low unskilled labor cost, avoidance of trade barriers, geographical proximity, and prospects for market growth are the most important invectives for FDI in Bulgaria. What is more, the paper explores the specific obstacles /barriers/ that foreign investors and foreign MNEs face during the establishment of their FDI projects in a transition country, such as Bulgaria.

Keywords: country risk, transition economy, credit rating, foreign direct investment, multinational enterprise, decision making

JEL classification: F21, F23

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7th Global Conference on Business & Economics

ISBN : 978-0-9742114-9-7

INTRODUCTION This paper examines the impact of country risk on Foreign Direct Investment /FDI/ inflows in Bulgaria. FDI in general refer to long-term cross-border investments with a substantial influence on the investing multinational enterprise. According to Hauser (2005) the principal difference between foreign direct investment and other forms of investments is that the purpose of foreign investment is to acquire lasting interest in enterprises operating outside of the economy of the investor. The investor’s purpose is to gain an effective share in the management of the enterprise. The IMF suggests 10 percent of equity ownership to qualify an investor as a foreign direct investor.1 The main feature that differentiates the foreign direct investor from the portfolio investor is the existence of a long-term relationship and a significant degree of influence on the management of the enterprise. According to Shaheen (2005), and following Jensen (2003), FDI is the investment of Multinational Enterprise’s privately owned capital into a foreign country. Any type of risk reflects on investor’s decision of whether to invest or not, how, and when. What kind of risk is country risk? How can we define it? Is it precisely calculable probability, that could be easily integrated into the investment valuation equation, or it falls more into the uncertainly category? There is a huge variety of definitions of country risk in economic literature. For Meldrum (2000) many of the occurrences composing country risk are more or less attributable to uncertainties, rather than well defined statistical risks. According to White and Fan (2006) country risk is the unanticipated downside variability in a key performance indicator, or significant strategic target, which results from engaging in international business transactions. Hoti and McLeer (2002) define country risk as the likelihood that a sovereign state or borrower from a particular country may be unable or unwilling to fulfill their obligations to one or more foreign lenders.

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7th Global Conference on Business & Economics

ISBN : 978-0-9742114-9-7

FDI is an investment decision and as such, the investor needs to consider and obtain quantitative measure of risk before taking it, in order to incorporate risk into the investment equation. Country risk assessment evaluates economic, financial and political factors, and their interactions in determining the risk associated with a particular country. Country risk may be prompted by a number of country-specific factors or events. 2 According to White and Fan (2006) country risk can be decomposed into the following subcomponents: political, economic, financial and cultural risk. Hoti and McLeer (2002) restrict the sub-components up to political, economic and financial risk. Meldrum (2000) separates country risk into six main categories – economic risk, transfer risk, exchange rate risk, location and neighborhood risk, sovereign risk and political risk. According to him some risk categories contain much higher degree of risk for Multinational Enterprises /MNEs/ than others, due to the longer time horizons, applicable to FDI. How important is actually country risk and to what degree it may impact foreign investment decisions? To answer that question Hauser (2005) examines the impact of country risk on the following FDI decisions: Greenfield investment versus acquisition, entry or no entry, timing of entry, and vertical or horizontal FDI. Hauser points out that a multinational enterprise has two ways to enter a foreign market – through acquisition or Greenfield investment. Previous studies (see Caves, 1996) on the topic signify that takeovers are less risky than Greenfield investments and appropriately yield lower rate of return. The more uncertain the environment, however, the more degree of control the investor would require. Following this logic, the decision of entry via acquisition or Greenfield investment could also be driven by uncertainty in the host country.3 When the impact of country risk on timing of entry comes into consideration, different theories suggest different responsible factors. Some authors (see Buckley and Casson, 1981) argue that the “optimal” timing of FDI depends on the differences in the costs structure of

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7th Global Conference on Business & Economics

ISBN : 978-0-9742114-9-7

alternative market strategies, such as exporting and licensing, and market development via direct investment. Other authors analyze the optimal timing of FDI and find OwnershipLocation-Internalization (OLI) advantages (see Dunning, 1993) to be determinants of the timing of market entry under uncertainty.4 Hauser (2005) compares the entry decision to an American call option. He presents the decision maker as having the right and not the obligation to undertake the investment at an exercise price which is the sunken cost of investment. In respect to different types of FDI, a vertical FDI occurs if a multinational enterprise (MNE) geographically separates stages of the production process. A horizontal FDI takes place if the MNE produces the same goods or services in multiple countries in order to serve the local market. Aizenman and Marion (2004) study the impact of uncertainty on different types of FDI and show that higher volatility of supply shocks increases the expected profits associated with horizontal FDI and reduces the expected profits from vertical FDI. According to a recent research (see Levasseur, 2006) FDI responds to two large motivations. They can be market-seeking (local market-oriented) or efficiency-seeking (export-oriented). Local market-oriented FDI is set up by horizontally integrated MNEs in order to penetrate a market, increase their market share, diversify the source of sale, and minimize competition risk. Exportoriented subsidiaries are set up by a vertically integrated MNE in a host economy with the aim to lower production costs or to seek, secure and diversify resources.5 It is clear that, as every type of uncertainty, country risk has a strong impact on FDI and should be incorporated in long-tem investment decisions of MNEs. But is country risk the only determining factor behind FDI? Shaheen (2005) studies the extent to which geographic, economic and demographic features of a host economy could attract FDI. In addition to this,

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in particular. such as Bulgaria. location and the progress made in the process of transition. represents a very important FDI determinant. Blaźić and Vlahinić-Dizdarević (2006) also review the factors determining FDI.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Shaheen (2005). Proximity to home country has been proven to be a major factor as well. The closer the geographical and cultural proximity. especially ones which are considered export-driven. include market size. such as Bulgaria. host country risk. Italy 6 . Janicki and Wunnava (2004) find that the key factors determining FDI inflows in Central and Eastern European /CEE/ counties are size of the host economy. The study proves that international trade is perhaps the most important determinant of foreign investment. He claims that MNEs tend to invest in countries with transparent. the paper explores the specific obstacles /barriers/ that foreign investors and foreign MNEs face during the establishment of their FDI projects in a transition country. especially institutional development. and this situation represents an attractive opportunity for foreign firms.6 Similarly. liberal and democratic governance. Bevan and Estrin (2000) argue that countries that are more liberal in their trade approach tend to export more. but their study concentrates on Southeast European /SEE/ counties. the greater the trade flows. following Oneal (1994). and openness to trade. such as regime type and political climate. This paper investigates the major factors (market and non-market) that determine the size and the quality of FDI inflows in a transition economy. prospects for market growth. The study evaluates the specific impact of different country risk’s components on FDI decision making process from a Bulgarian perspective. regardless of FDI type or country. The next section presents a comprehensive analysis of the FDI inflows in Bulgaria October 13-14. 2007 Rome. The rest of the paper is organized as follows. According to them the most important FDI determinants. They find that larger economies provide larger economies of scale and spillover effects. It has also been documented that the progress in the general process of transition. degree of development of host country. define some other non-market determinants of FDI. What is more. labour costs in host country.

Section 3 details the methodology used to study the impact of country risk on FDI inflows in Bulgaria. Even though the process of privatization began in 1990. Italy 7 . 7 However.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 for the period 1992 – 2006 and compares them with foreign investments in other CEE counties. For this reason it is important to investigate the investment climate in Bulgaria and evaluate how attractive the economy is for foreign investments. by 1996 only 11% of the state assets were privatized. It is certain that Bulgaria is offering unique advantages to foreign investors. Some concluding remarks are offered in the final section. grouped in two categories depending on the size of their investment project(s). One of the most important determinants that have influenced the FDI inflows in transition economies is the process of privatization. barriers and risks. FDI INFLOWS IN BULGARIA: A CASE STUDY This study compares the size and the quality of FDI inflows in Bulgaria with foreign investments in other CEE countries. obstacles. According to Levasseur (2006) FDI inflows are important engine for convergence of all CEE countries with their more advanced Western European neighbors. Section 5 deals with reforms and improvements in the Bulgarian business environment foreign investors expect to see in the next five years. Foreign MNEs also contribute to the upgrading of production capacities in those countries by carrying out technically demanding production functions. Research data from the survey is used in section 4 to analyze the specific impact of country risk’s components on FDI decisions from a Bulgarian perspective. The low level of FDI inflows in the early period of transition until 1997 could be explained by the high investment risk related to October 13-14. coming in the same package with its unique disadvantages. The survey includes more than 130 large and midsize companies invested in Bulgaria during that period. 2007 Rome. the FDI inflows in Bulgaria do not start growing until after the late 1990s. and are major determinant in their economic growth.

the net increase in FDI is still weak . For the 5-year period between 1992 and 1997. For example. Large FDI inflows entered our country via small number of deals with large foreign companies. which was introduced at that time. especially in the period 1997-2004. the net increase is much higher.2 million and they continue to increase. Italy 8 .7 million.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 overall instability in the country and the slow political. The third selected entry mode of FDI was acquisition of already private property and amounted to 22% of all transactions. in 1997-2004. The new Encouragement of Investment Act (2004) sets forth preferential treatment measures for investment meeting certain criteria specified in this law as follows: • The investment to be in fixed assets acquisition with the purpose of creating new or enlarging or modernizing existing production of goods and/or services. the FDI flows were US$ 636.it rises with 1% of GDP. However. since they will not be discriminated and offered harder conditions in any way. An important incentive for FDI is the fact that the Encouragement of Investment Act equally applies to Bulgarian and foreign investors. reaching 6% of GDP.8 According to Zafirova (1999) over one-third of the companies that have invested in Bulgaria during that period chose to take part in the privatization process. 2007 Rome. • • New jobs to be created. As the World October 13-14.9 The continuous and rapid increase of FDI inflows in Bulgaria. while for 1997 only. economic and institutional reforms. This is beneficial for foreign MNEs seeking to invest in the country. The investment project to be implemented within 3 years. The investment climate in Bulgaria became more favorable after 1997 because of the Encouragement on Investment Act. and/or expanding of the existing ones. they just have to provide more constructive conditions than the domestic investors. the FDI inflows amounted to US$ 766. in 1995-1996. and 53% focused on building of new production capacity. is due to the progressive structural reforms and the increasing economic stability.

the FDI per capita in the country has already surpassed the $500 mark. indicating that new FDI-driven investments are reaching a critical mass needed in order to have a sizable impact on Bulgaria’s improved capacity to compete in external markets. except for the 2004 when the government sold to foreign investors the national telecommunication company BTK.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Bank (2004a) report states yet. topping US$ 2. Foreign investors enjoy a low taxation of corporate profits (10% from 2007) and double taxation treaties with a number of jurisdictions. 2007 Rome. the FDI from privatization depends on the government intentions and decisions. country of origin and by sectors. as well as some of the electrical distribution plants. In order to assess the size and quality of FDI inflows in Bulgaria we analyze them by type of investment. There are no restrictions on foreign currency transactions and the repatriation of profits. FDI inflows to the country has grown substantially the last three years. Bulgaria reduces its corporate tax from 19. FDI Inflows By Type Of Investment The data in Table 1 shows that FDI inflow from privatization is not the more significant type of foreign investment.5% to 15%.8 billion at the end of 2005 with the leading recipients of FDI in recent years being the energy sector and transportation. Another factor that is important for attracting new FDI inflows in the country is that in 2005. Moreover. 11 That is why the Greenfield investment and the expansion FDI projects are more important for October 13-14. and disappears when the privatization process is finally completed. and communication infrastructure. the Bulgaria government announced a legislation that had simplified the acquisition of real estates by EU residents after accession but keep restrictions on agricultural and forest lands. Moreover. Italy 9 .10 According to Eurocapital Finance (2006) report Bulgaria has as a whole a favorable regulatory environment for FDI. before its accession to the EU.

after Turkey. the total FDI inflows in Bulgaria reached the level of US$ 17. and the low investment risk. Bulgaria still occupies the fourth place in Southeast Europe. could be classified as small economies in economic terms.6 billion. in 2006 they amount to 16. Bulgaria is a leader in Central and Eastern Europe when the FDI inflows are taken as percentage of GDP (see Table 2). [Insert Figure 1 here] The data on FDI inflows. Romania. [Insert Table 2 here] October 13-14.4% of GDP. In the third quarter of 2006.5% are in Greenfield investments and expansion projects. Italy 10 . and Greece (see Figure 1). of which 81. 2007 Rome. take in to account the size of the economy and indicate the relative importance of foreign investment in the country. The data for Bulgaria show that while in 1998 FDI inflows were only 4. According to the Southeastern Investment Guide 2006. [Insert Table 1 here] In 2006. it is to be expected that foreign capital would represent an important part of the country’s gross national product. when measured as a share of GDP.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 the economic growth and sustainable development of the country.12 This remarkable increase in FDI inflows is mostly due to the finalization and re-launching of some delayed privatization deals.7% compared to 2005). Since all CEE countries.4% of gross national product (an increase of 53. including Bulgaria. despite the rapidly growing FDI inflows. Although the country is still behind the other countries in the region in terms of the total amount of FDI inflows. grow with a higher rate. more stables macroeconomic and business environment. amounting to more than US$ 1 billion for the year of 2000. According to the data in Table 1 since 1999 the FDI inflows. and surpassing US$ 2 billion after 2003. especially those from Greenfield investment and expansions. FDI flows in the region reached a historic record in 2005 of nearly € 20 billion.

In the subsequent years. only US $301 million (see Table 3).2000 is the lowest. Romania. Italy 11 . Croatia's FDI stocks surpass our country's FDI stocks. However. Moreover. the outward FDI flows are negative. comparing just these four countries (Bulgaria. especially after the year of 2002. 2007 Rome.4 times higher in 2006.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 A fast growth of cumulative FDI in Bulgaria is also observed.13 According to the Bulgarian National Bank statistics. Considering the FDI flows in 2005. Bulgaria is last but one in the group of SEE countries. of foreign direct investment. both the inward and the outward FDI flows in Bulgaria grow substantially.14 FDI Inflows By Country of Origin According to the United Nations Conference on Trade and Development (2006) report the inward FDI flows to Bulgaria for the period 1990 . This places the country second in the region after Croatia in terms of per capita FDI. the FDI stocks of Bulgaria are the highest in the 1990s. before the Russian Federation and Croatia. Croatia. The accumulated FDI inflows are 9. than in the year of 1998 (see Figure 2). An exception is 2004 when Bulgaria is second but last.058 billion. which testifies for the huge trade current account deficit at that time. from 2000 onwards. Despite that growth the other countries’ FDI increase more rapidly. and the Russian Federation).015 billion. . October 13-14. the Check Republic and Hungary. after the Bulgaria’s accession in the EU. in 2006 the country attracts € 4. [Insert Figure 2 here] The data for FDI inflow in per capita terms show that Bulgaria takes the fourth place in 2005 after Estonia. Now. leaving Bulgaria again on the last place among those four countries. an influx of over € 11 billion from EU cohesion and structural funds in 2007-2013 is expected for improvements in roads and other essential infrastructure.US $4 million. with Croatia being the last one and the other two countries being ahead. or US$ 5. On the other hand.

FDI flows in tradables have not reached a sufficient critical mass to have a robust positive impact on productivity. about 60% of FDI in Bulgaria was located in services. Italy 12 . which invests US $842 million. nearly all in manufacturing. 2007 Rome. in same the period. and Austria devoting US$ 554 million to FDI to Bulgaria (see Table 4). Greece (9 percent). [Insert Table 4 here] FDI Inflows By Sectors According to the World Bank (2004b) report. a large share of the FDI flows was in the services sector or inward-oriented activities.1 percent). after 1999. The followers are the Netherlands.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Regarding the inward FDI flows as percentage of GDP.2 percent). To some extent this can be explained by the fact that some of the best opportunities in Bulgaria for foreign investors have been in sectors that dominate the domestic market. the data show that in the period 1992 – 1999. being among the top three counties in terms of total invested capital by the end of 2006. or 17. The UK invests the biggest FDI amount in 2006 – US$ 862 million. such October 13-14.1% of total FDI. followed by the Netherlands (10. [Insert Table 3 here] When FDI inflows are analyzed by country of origin.9 percent). Bulgaria is a leader both in the region and in Europe (see Table 3). the country that had invested the largest amount of capital in Bulgaria was Germany 12. Hence. On average. and only a small share is in the tradable sectors. during the period 1998 – 2003. USA. and only about 30% of FDI was in tradables. and the UK (7. However. The countries that follow Germany by the size of invested capital are Belgium.9% of the total FDI. Austria and Greece begin to catch up with them. and the Netherlands. As the data from the table show the country that has invested the most for the whole period 1992 – 2006 is Austria (16. with more than half of these flows in the financial sector.

2007 Rome. telecommunications and trade and manufacturing. while market-seeking FDI mostly focused on local needs in the services sector accounts for the remaining two thirds. mineral products and other inputs for the construction industry. However. business services. and are upgrading their factories from simple assembly to higher value-added activities. Service-related FDI inflows into Southeastern and other transition countries have followed the trend of growth in services worldwide and in the region itself. According to Bank Austria Creditanstalt and UniCredit Group (2007) report. and electricity distribution. with the end of Multi-Fiber Arrangement /MFA/ quotas and Bulgaria’s accession in EU in 2007 foreign investors in textiles. chemical. In some cases. between 1998 and 2004. law wages in Bulgaria attracted US$ 226 million worth of FDI in ‘cut and make’ textiles. can no longer rely on wage competitiveness alone. For example. producing intermediate goods. is oriented to the sectors. A research of Blaźić and Vlahinić-Dizdarević (2006) on the distribution of FDI by economic activities. in 2006. finds that most of the FDI in SEE counties have been concentrated in financial services.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 as banking. rubber and plastic products. Italy 13 . like petroleum. in which costumers provide all inputs expect labor. metallurgy and metal products. At the same time the United Nations Conference on Trade and Development (2006) reports that not all FDI projects in the region have hightech content. However. the efficiency-directed FDI seek delocalization and re-export FDI represents around one third of total FDI stock in Bulgaria. A big share of foreign direct investments. low wages attract projects in low value-added activities as assembly manufacturing. Traditional sectors seem to be among the most relevant targets for FDI expansion. with food and beverages and textiles reporting a particularly strong presence of foreign companies. it also reflects impediments to outward-oriented investment. dedicated to manufacturing. This has resulted in a strong inward orientation of FDI. such as Miroglio (Italy) and Rollman (Germany). which is growing fast in the last two October 13-14.

7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 years. construction – US$ 523.1 million. Previous research (see Bitzenis. Electricity.8 times more than those in 2005.8 million.414.9 million. and Blaźić and Vlahinić-Dizdarević. The study attempts to identify the major factors of the business environment that foreign companies examine before entering the Bulgarian market. to study the impact of country risk on FDI inflows in the country. Moreover. Italy 14 . The financial intermediation sector has attracted the highest amount of foreign investment (US$ 3. to identify the specific obstacles /entry barriers/ that foreign investors and foreign MNEs face during the establishment of their FDI projects in a transition country. and second. trade & repairs –US$ 559. 2007 Rome. and metallurgy and metal products – US$ 502. The data in Table 5 supports these findings. such as Bulgaria. amounting to US$ 1. 2006 and 2007.6 million. 2006) on FDI in transition economies finds that foreign MNEs examine the same factors to become familiar October 13-14. Interestingly.7) over the period 1998 – 2006. gas and water supply are also among the most attractive sectors for foreign investment and are expected to grow even more in the years to come. According to InvestBulgaria Agency (2007d) report the largest share of the FDI inflows in 2006 is in the real estate and business services sector. the investments in construction are 2. The leading sectors of FDI inflows are followed by the financial intermediation with US$ 906 million. Our purpose is twofold: first. metallurgy and metal products manufacture have brought inflows of almost 10% of the total FDI inflows for 2006 and are the leaders in the processing industries. which is 2.579. [Insert Table 5 here] RESEARCH METHODOLOGY The research methodology of this study is based on a questionnaire used to collect information about country risk assessment and investment decision making process in Bulgaria.15 times higher than the inflows in 2005.

adding another forty two companies with the amount of invested capital at the end of 2002 between BGN 1.15 has been created. trade and services. Each represents a significant percent of the total FDI inflows in the country. Italy 15 .6 million) invested in a shopping center in Sofia. The questionnaire October 13-14. According to InvestBulgaria Agency the total invested capital by these largest MNEs amounts to US$ 11. For the purposes of our study we extended the list to 132 foreign investors.769 million (or 58. have invested over BGN 10 million between 1993 and 2006. and Mercury Group with € 80 million (or US$ 100.2006. Our sample is very representative of the real economic situation in Bulgaria as it consists of companies investing significant amount of capital relative to the size of the Bulgarian economy.0 million and BGN 10 million.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 with the host country’s business environment and have more successful investments. Sample Design As a first step of our research methodology. The sample is also representative because we managed to collect and analyze data in all the sectors of industry. These companies belong to the top 109 foreign investors in Bulgaria at the end of 2006 (ranked by the size of investment). Examples of such successful foreign investors are the US Tishman Management Company which has invested by the end of 2006 more than € 200 million (or US$ 251. With the help of the InvestBulgaria Agency (IBA) – an official partner of our research project – a list of 90 large companies that. These 42 new foreign MNEs were not included in the IBA’s officially published data of largest foreign investors in Bulgaria and data were collected from the Bulgarian Privatization Agency.4 million) in Sofia Airport Center. according to the IBA statistics.84%) of the total volume of foreign investment in Bulgaria for the period 1993 . we have established criteria based on which to create the population for our survey on foreign MNEs in Bulgaria. 2007 Rome. We do not share the same findings.

etc. Eightyfive percent of the projects implemented by the largest foreign investors from these countries are Greenfield and expansion projects. as implemented by the foreign MNEs included in the sample. The total number of countries represented in our sample is thirty. and by sectors. The largest number of October 13-14. Among the 132 companies twentyfive MNEs (18. American Standards (USA).9 percent) – of US origin (see Table 6). Almost the same is the share of Greenfield and expansion projects (72 percent) implemented by the other 42 foreign companies in the sample (mostly small and medium-sized enterprises). Shell (UK). The questionnaire was enriched and updated according to the specificity both of the Bulgarian business environment and the type of foreign investors. The sample includes foreign MNEs of different origin.4 percent) are from Austria. Umicore (Belgium and the Netherlands). 2007 Rome. The second step of the research methodology was to divide the foreign investors included in the sample in different groups following Bitzenis (2003) model regarding the possible reasons for and entry barriers to FDI in Bulgaria. It is worth to mention the projects implemented by Solvay (Belgium). Bulgaria is placed second among SEE countries after Rumania when the total number of FDI projects is considered. The companies were grouped based on the following characteristics . type of investment (entry mode). mainly through privatization. Australia16 in a similar research study of the largest Australian companies investing aboard.17 Of 572 investment projects in total 466 (or 81. Italy 16 . and 13 MNEs (9. 15 foreign MNEs (11.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 was initially developed following the methodology used by the La Trobe University. and only 101 (or 17. These are among the top ten countries that have invested the largest amount of capital in Bulgaria in the period 1992 – 2006 (see Table 4).9 percent) are of German origin.5 percent) are Greenfield and expansion projects.7 percent) are acquisitions. [Insert Table 6 here] Table 7 presents the distribution of FDI projects by type of investment.country of origin.

followed by wood products and paper (18 project). or 11. or 8. Only 19 new Greenfield and expansion projects were initiated in 2006 by the same companies. textile and clotting (23 projects).049 million. with the amount of invested capital in the range of BGN 17. implemented by the top 90 foreign investors follow the same distribution. petroleum.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Greenfield projects (68.253. [Insert Figure 3 here] The new Encouragement of Investment Act (2004) sets forth preferential treatment measures for investment projects meeting certain criteria specified in this law. The largest share of FDI inflows is in financial intermediation sector (68 projects. and machine building (15 projects). The largest number of jobs (2. The total number of mixed projects (Greenfield plus acquisition) for the whole period is only five. rubber and plastic products (31 projects). and 3 projects – of class 3 (depending on the size of the investment project as specified in the Regulations for Application of the Encouragement of Investment Act). chemical. [Insert Table 7 here] Next. Italy 17 . While the FDI projects. shows that 26 projects have been certified as projects of class 1. rubber and plastic products (50 projects. The preferable sectors of investments are petroleum. These four sectors have brought 10. we distribute the total FDI projects by sectors (see Figure 3).9 percent of the total FDI inflows in Bulgaria for 2006. This can be explained by the fact that most SMEs set up their investment projects in sectors with low unskilled labor cost and lack of local competition. one project – of class 2. One of these criteria is the new jobs created. data for small and midsize MNEs in the sample show a different pattern.7 percent) and trade and repairs (48 projects. 2007 Rome. or 8. implemented in the period of 2004 – 2006 by thirty of the largest foreign investors (see Table 8).9 percent). The total number of new jobs to be created by these projects is 12. followed by food products (51 projects.0 million to BGN 2.4 percent). chemical.280) is expected to be October 13-14. 18 The analysis of the projects.9 percent). or 11.9 percent) was implemented in 2001. or 8.

. The study also tries to identify the major improvements in the Bulgarian business environment that the foreign investors expect. the first section of the questionnaire for assessment of general country risk includes questions about the impact of different elements of the Bulgarian business environment on foreign MNEs’ long-term investment decisions. credit rating agencies. the industry the foreign companies are operating in. October 13-14. and the type of market the foreign direct investments are oriented to.) on country risk assessment process. economic. [Insert Table 8 here] [Insert Figure 4 here] General Questionnaire The executives and top level managers of the surveyed companies were asked three groups of questions: 1) assessment of general country risk and its relevance. Italy 18 . For the second group of questions the managers of foreign MNEs were asked to rate the impact of different components of country risk – political.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 created by Karfur Bulgaria’s project for establishing a hypermarket and trade center in Sofia (see Figure 4). and 3) the incentives for foreign direct investment in Bulgaria and expected improvements. economic research services and databases. the assessment framework of country risk within the company. The questions in the last section of the questionnaire relate foreign investors’ decision making process with the major incentives for FDI in Bulgaria in order to be able to identify the types of motivations and entry barriers that foreign investors consider in deciding whether or not to invest in Bulgaria. on the scale from 1 to 5. For example. Each category consists of subgroups of specific questions. the questionnaire studies the specific modes of foreign market entry. financial. 2) the impact of country risk components on a firm’s foreign investment decision making process. etc. on their foreign investment decisions. 2007 Rome.g. and cultural risk. Finally. and the relevance of different sources of information (e.

Italy 19 . 2007 Rome. unpredictability of laws and regulations (30 percent). and excessive taxation (20 percent) are also mentioned as important obstacles the foreign MNEs face in making long-term investment decisions in Bulgaria (see Figure 5). incoherent and unstable legal system (35 percent). Opportunities arising from the investment are ranked third by 50 percent of the survey companies. October 13-14. the correlation between the factors in these groups is examined. bureaucracy (20 percent). Political instability (25 percent). Following the methodology described above the analysis is done separately for different groups of questions included in the survey. Regarding the relevance of general country risk and its impact on FDI decisions. the data from the questionnaire is analyzed and studied with the help of statistics. the survey shows that 95 percent of the foreign companies in sample do assess country risk as an important component of their foreign investment decision making.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 SURVEY RESULTS In order to be able to identify the impact of country risk on foreign investment decision making process. and crime and correction (25 percent) as the most important entry barriers to FDI in Bulgaria. as well as motivations and barriers to inward FDI that foreign companies consider in deciding whether or not to invest in Bulgaria. while 65 percent of them indicate the risk attached to the investment project as very important risk factor.19 When different elements /factors/ of the Bulgarian business environment and their relevance to FDI decisions are considered the foreign MNEs managers indicate high investment risk (40 percent). Eighty percent of foreign MNEs managers consider the profit arising from the investment the most important factor in making long-term investment decisions. Only 35 percent of the managers of the foreign companies consider the costs attached to the investment as an important factor in making strategic decisions abroad. and then.

Regarding the attitude of the foreign investors towards overall business risk in the country after Bulgaria’s accession in the EU in 2007 the data show that 50 percent of all surveyed companies are moderately risk takers. Later establishment of FDI projects in Bulgaria followed other forms of market entry. Only 10 percent of the companies are ready to take a high level of risk when investing in a transition economy.1 percent of the total FDI projects) can be explained by the fact that most of these companies. such as Bulgaria. Italy 20 . created in the early years of transitions had collapsed due to insufficient cooperation of local partners with foreign investors. as foreign investors learned more about the Bulgarian business environment and the economic conditions had improved significantly. while 15 percents are risk neutral or extremely risk averse. 2007 Rome. or because foreign MNEs acquired the remaining part of enterprise’s shares. high investment risk and incoherent and unstable legal system in Bulgaria as major obstacles for their foreign investment decisions. such as Greenfield FDI or acquisition through privatization.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 [Insert Figure 5 here] One interesting difference between the attitude of small to midsize MMEs (with the amount of invested capital less than BGN 50 million) and large MNEs (with the amount of invested capital between BGN 50 and 650 million) to FDI barriers is that the first group of companies consider bureaucracy. During the period 2000 – 2006 the Greenfield plus expansion projects become the prevailing mode of entry (see Table 7). and unskilled labor force as the most important entry barriers. The reason for different motivation of these two groups of foreign investors is that small and midsize MNEs entered the Bulgarian market mostly through acquisitions and joint ventures. The survey shows the surprising fact that 37 percent of the interviewed companies do not have a formalized/institutionalized system of country risk assessment although they assess October 13-14. excessive taxation. while the second group consider crime and corruption. In compliance with Bitzenis (2006b) findings the low percentage of joint ventures (2.

some type of regular reporting on the changing risk environment in the host country. In 85 percent of all cases the foreign MNEs use a combination of external and internal sources of information for their country risk assessment process. in this case Bulgaria. Italy 21 . assess the risk only when the need arises. Equally important sources of information are reports from outside economic research services or combinations of two and more sources of information (15 percent). while 10 percent of them rely on external sources only. If a foreign investor does assess the risk of the host country. that is. that is. In most cases the project proposals include an assessment of specific risk characteristics based on feasibility study or case October 13-14. The foreign MNEs report different approaches to assessing the level of risk attached to a particular project depending on whether the company has a centralized system of risk assessment or it is done on project-by-project basis. Regarding the major sources of information the foreign MNEs use to assess the county risk. while in 30 percent of the cases it is done occasionally. and articles from business publications are ranked on the second place (17 percent). 31 percent of them indicate official economic data and analyses as the most relevant source of information. Though some of the surveyed foreign companies assess the host country risk as part of their decision making process. the frequency according to 15 percent of surveyed companies is less than quarterly. in 53 percent of the cases they do not have any formal country risk monitoring system. 2007 Rome. Only 15 percent of foreign MNEs are continuously tracking the investment project risk. Thirty-three percent of the foreign MNEs report that the general responsibility of assessing country risk belongs to the country manager or the regional manager and in 25 percent of the cases this responsibility is assigned to a specific department or formal country risk assessment committee. Additional sources of information used by foreign investors are published data from country risk rating agencies (10 percent) and reports from on-site visits submitted by regional managers (7 percent).7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 the investment risk on a regular base (in this case 74 percent of all surveyed companies).

easily accessible and provide authoritative analysis and forecast. ICRG political risk services. Only 30 percent of the foreign investors consider cultural risk as important country risk’s component. The foreign companies prefer these sources of information because they are internationally recognized. while only 5 percent – on data published by Economic Intelligence Unit. Control risk information services. etc. Other sources such as official economic data and analyses published by UNCTAD services. economic. The second large group of questions investigates the impact of country risk’s components on a firm’s foreign investment decisions.). reports from external financial analysts or risk management units to assess and continuously track the foreign investment project risk. Fifty five percent of the surveyed companies consider economic risk as the most important determinant of FDI. most of the foreign MNEs find the impact of these components more important in transition economies (in this case Bulgaria) October 13-14. such as Moody's Investor Services and Standard and Poor's (S&P) Rating Group. In seeking reliable information on country risk 15 percent of the surveyed companies rely on information from country risk rating agencies. financial and cultural risk. while 35 percent of them indicate financial risk and political risk as very important risk factors. Italy 22 . and Euromoney services are not considered to be useful sources of information by 70 percent of the MNEs managers because they are not familiar with them. official economic data and analyses. When the relevance of country risk’s components associated with investing in developed economies as compared with investing in transition economies is considered. Foreign banks or their branches/subsidiaries in Bulgaria use specific models of risk assessment based on rating/scoring systems. The study reveals another important characteristic of the country risk assessment process. Some foreign MNEs are continuously assessing the investment risk through review and regular adjustment of the information collected from different relevant sources of information (country reports. 2007 Rome.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 analysis. They are classified in four major groups – political.

including nationalism (5 percent). Less attention is given to factors such as acts of terrorism (10 percent) and competing political philosophies. including criminal activity. while the impact of slower economic growth and high deficit in the current balance of payments increase. When the same political components and their likely impact on FDI decisions in the next five years are considered internal insecurity. and violation of laws and orders are ranked again first by 30 percent of all surveyed companies. Thirty percent of the surveyed companies point out violation of law and orders and organized crime as another important factor that impacts their foreign investment decision making process. together with deliberate changes in economic policy and regulations as the most important impact factors to their FDI decisions. 35 percent of the foreign MNEs evaluate the impact of factors such as frequent changes in fiscal and tax policy October 13-14. in this case Bulgaria. The deficit in current balance of payments is reported to be an important factor in foreign investment decision making process for only 10 percent of the investors. In assessing the impact of economic risk of the host country 35 percent of the foreign investors consider undeveloped infrastructure as the most important factor to their FDI decisions. When the financial risk’s components are taken into consideration. are bureaucratic impediments and high inflation rate. Other economic risk’s components that 20 percent of foreign MNEs consider important when assess the investment risk in a particular country. For example. political or financial policy. when the political risk’s components are taken into consideration 35 percent of the foreign MNEs evaluate internal insecurity.37). The reason is that the business environment in developing countries is more sensitive to any significant changes in economic. Italy 23 . When the same economic risk’s components and their likely impact on FDI decisions in the next five years are considered the role of factors such as bureaucratic impediments and high inflation rate diminish.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 than in developed countries (factors’ mean of 3.75 versus 2. 2007 Rome. including criminal activity.

There are 27 country risk factors with a significance level (two-tailed test. these variables are one of the many factors that foreign investors consider in making long-term investment decisions. and not so relevant for the rest of the companies. together with ignorance of the patterns of business behavior. When the same financial risk’s components and their likely impact on FDI decisions in the next five years are considered.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 as very important. Italy 24 . When the same cultural risk’s components and their likely impact on FDI decisions in the next five years are considered corruption and nepotism.20 When the mean difference between the factors from different groups (political. in these cases we can reject with a high degree of certainty the null hypothesis (Ho) that the mean value of the risk factors is close to. Ethic and religious differences or tensions are seen as important factors to FDI decisions in only 10 percent of the cases. respectively. are estimated as the most important risk factors by 40 percent and 20 percent of the surveyed companies. especially for foreign MNEs from neighboring countries because of the knowledge of Balkan business ethics and the cultural proximity. or equal 3. Cultural risk’s components are also considered important for majority of the surveyed companies. while another 15 percent consider stability of bank system and restriction/difficulties on access to credit and capital markets as critical finance factors to their foreign investment decisions.05. 2007 Rome. the attitude of foreign MNEs managers towards these factors is not changed. financial and cultural risk at present and in five years) is considered. that is. 95 percent confidence interval) less than 0. the results from Paired Sample T-test (not reported here) show that in 80 percent of the cases the null hypothesis (Ho) that the factors’ means are not considerably different from each other cannot be October 13-14. while another 25 percent consider ignorance of the patterns of business behavior as relevant cultural risk factor. Forty percent of them point out corruption and nepotism as the most important impact factor. Statistical analysis supports these findings (see Table 9). economic.

2007 Rome. links to other neighboring countries. all the four components of the country risk are considerably different from each other when assessed in terms of their importance to FDI decisions in developed economies as compared with FDI decisions in transition economies. especially those from neighboring countries (Greece. the factors are not considerably different. and not to serve the local market. financial aspects (20 percent). low unskilled labor costs. unsatisfied local demand. One possible explanation is that the foreign investors do not expect any significant changes in the Bulgarian business environment in the years to come. efficiency (20 percent). unsatisfied local demand for products. Cyprus. For small foreign MNEs. Only 5 percent of all foreign MNEs managers consider cultural closeness and exploiting ownership advantages as important incentives to their FDI decisions. following the client’s theory (20% percent). The cost factor is especially important for these companies as most of the small foreign MNEs use the low costs of labor force to create an export base. For 10 percent of foreign investors incentives such as geographical proximity. There are only six cases in which the results are statistically significant and we may accept the Ha hypothesis. and Turkey) factors such as low labor cost of unskilled workers. Italy 25 .7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 rejected. The proximity of these companies to Bulgaria. low skilled labor costs (15 percent). avoidance of trade barriers (15 percent) and establishing an export basis (15 percent). October 13-14. market size (25 percent). For example. [Insert Table 9 here] The last group of questions studies the incentives for foreign direct investment in Bulgaria and expected improvements. avoidance of trade barriers and links to neighboring countries are the most important incentives for their investment in Bulgaria. Figure 6 indicates that the main incentives for FDI in Bulgaria are opportunities for market growth (30 percent). which contradict our preliminary expectations. and lack of local competition are of equal importance. In all other cases related to their expected impact in the next five years.

Only 5 percent of foreign MNEs in this group created joint ventures. although acquisition (mostly through privatization) was the most preferred mode of investment during the yearly years of transition. we can ague that trade activities and FDI are complementary for countries such as Bulgaria. Cyprus. which allows them to exploit the existing business links when entering the Bulgarian market. the geographical proximity is one of the major motives for their FDI activities. Thus. Out of these 61 percent chose acquisitions and mergers to take advantage of the opportunities that the Bulgarian privatization program has offered.21 We may also expect that most of the foreign MNEs would enter the Bulgarian market in order to acquire a large market share due to the absence of significant competition. Moreover. Thus. the size of the market. This can be explained by the existing strong trade relations between Greece and Bulgaria. with strong brand name and reputation.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 their good knowledge of the local market. and Turkey as import and export to and from these counties increase proportionally. in many cases they are indifferent to the lack of local competition. 70 percent of foreign MNEs included in our survey are large economic entities in respect to the size of the Bulgarian economy. [Insert Figure 6 here] For Greek investors. As mentioned before. such as Greenfield FDI or expansion projects. and the lack of local competition are additional motives to exploit cost differences between these markets and the Bulgarian market. and 35 percent . It is also interesting to explore the FDI barriers and incentives in relation to the entry mode and the sector to which each company belongs. Italy 26 . Greece.Greenfield and expansion projects as the best or prefer way of investing in Bulgaria (see Figure 7). low transportation costs. 2007 Rome. The data show that 48 percent of all surveyed companies use foreign direct investment as their preferable mode of foreign market entry. for example. as investors learned more October 13-14. in the following years foreign investors have used other forms of market entry.

7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 about the Bulgarian business environment and the investment climate became more favorable to foreign investments. Italy 27 .98 million). corruption. electricity. The data from the survey show that 35 percent of the foreign MNEs included in the sample have invested more than BGN 100 million (or US$ 60. while 10 percent of the companies invested less than BGN 10 million (or US$ 6. and mineral products (10 percent). or contractual agreements. availability of good and loyal partners in the host country. The distribution of the companies in the sample follows the general distribution of all foreign investors in Bulgaria by sectors (see Table 5). chemical. for example. and portfolio investment . export activities and Greenfield projects. metallurgy and metal products (10 percent). transport. The survey shows that 15 percent of the foreign companies included in the sample are currently operating in financial intermediation sector. logistics and communications. Twenty-three percent of foreign MNEs in the sample use a combination of two and more entry modes. According to the surveyed companies the most important factors to be considered in choosing a specific mode of entry are cost of entry.10 million). rubber and plastic products (11 percent).6 percent. The size of the investment is another important characteristic of FDI in Bulgaria. and water supply (11 percent). gas. and mining. 2007 Rome. experience in CEE countries. followed by sectors such as petroleum. potential risks and opportunities arising from the investment. The second type of MNEs are mostly small to midsize companies (SMEs) October 13-14. contractual entry (mainly through manufacture and services contracts) – 23 percent. and legal system). A relatively large number of FDI projects (25 percent) are implemented in other sectors such as engineering and information technologies. and specific factors of the business environment (political climate. [Insert Figure 7 here] Other preferable modes of market entry used by foreign MNEs are export activities (mainly through direct branches and subsidiaries) – 23 percent.

and further market liberalization. The survey also shows that 32 percent of the foreign companies included in the sample direct their business activities to the local market and not to foreign markets. 2007 Rome. Upgrading work force skills. • Facilitating the access to capital for companies investing in people and their training and qualification. Improving financial and fiscal system. The sectors they are currently operating in are electricity. Improving the social system in order to guarantee a fair social securities payment. they are not export oriented. This specific feature of the Bulgarian FDI can to some extent be explained by the fact that some of the best opportunities October 13-14.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 active in specific sectors of the economy with similar or identical problems to a business environment such as Bulgaria. and water supply. • • • • Importing work force from other countries in specific industry sectors. Decreasing bureaucracy and corruption among the governmental officials. trade and repairs. The rest of the companies (42 percent) direct their activities to foreign markets. financial intermediation. Twenty-six percent of the foreign companies have both import and export oriented activities. tourism. institutional framework and legal environment. decreasing income tax level..g. improving professional training and vocational system. and quality of life. that is. investments needed for the labor intensive and services sectors are lower than the capital invested in other sectors. Regarding the foreign investors’ attitude towards Bulgaria’s accession in EU in 2007. 95 percent of all surveyed companies expect significant improvements in the investment climate in Bulgaria. strengthening the cooperation between industry and universities. macroeconomic stability. Alleviating investment/licensing regimes. gas. Italy 28 . Their expectations are related to: • • • Improving infrastructure. e. Also. and mineral products.

However. Italy 29 . etc. The most important risk categories that may have an impact on FDI inflows in Bulgaria. As the data from the survey show a significant number of foreign companies in Bulgaria direct their FDI activities to the local market. political risk. such as government effectiveness risk. it also reflects impediments to outward-oriented investment and can be viewed as a major weakness of the FDI inflows in Bulgaria. according to the report. legal & regulatory risk. are security risk. foreign trade & payments risk. When different types of direct foreign investment are considered the survey shows that 67 percent of foreign investors in the sample follow horizontal type of FDI. and electricity distribution. Export-oriented branches/subsidiaries are set up in the country by vertically integrated MNEs with the aim to lower production costs or to seek. financial risk.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 in Bulgaria for foreign investors have been in sectors that dominate the domestic market. This has resulted in a strong inward orientation of FDI. such as banking. but access to capital in domestic markets is still limited.infrastructure risk and labor market October 13-14. macroeconomic risk. trade and repairs. are found to be high. the uneven quality in the physical infrastructure is presented as a potential risk. Some of them. secure and diversify resources. EXPECTED IMPROVEMENTS According to a recent research conducted by Eurocapital Finance (2006) the overall business risk in Bulgaria is relatively low due to the lack of political violence in the country’s recent history and its stable democratic system. and some others . The currency board brings additional stability in the country’s currency. 2007 Rome. This could be explained by the fact that horizontal FDI is the preferable mode of investment when foreign MNEs produce the same goods or services in multiple countries in order to serve the local market. However. real estates and business services.

7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 risk. 25 percent of the managers expect better conformity with the EU quality standards. followed by Turkey (49%). Only 12% of foreign investors relate their investment decisions with improvement of the quality of life in Bulgaria. the Ernst & Young (2006) survey lists the expectations of foreign investors for developments in certain areas of the Bulgarian economy in the next five years. and by the low labor costs.22 Bulgaria occupies the fourth place in respect to the reputation the country has among the foreign investors with 44% support. Italy 30 . 27 percent of the investors recommend strengthening the political stability. after Romania. since those investors who decide to enter the Bulgarian market will be attracted mainly by the transport and energy sectors. October 13-14. the survey expects that in three years Bulgaria will be already up on the second place among the countries in Southeast Europe. One third of the interviewed managers hope for improvements in the transportation and the telecommunication infrastructure of the country. Yet. These estimates of country risk components and their impact coincide with the findings from our survey. since this reform significantly improves the investment conditions in the country. In addition. The EU accession offers good opportunities to Bulgaria for improving its reputation in front of the foreign investors. while Serbia is on the fifth place with 26%. 15 percent of them want to see more flexible administrative procedures and less bureaucracy. the country may even go up to the first place. and Greece (48%). The leader in the region in this category is Romania (58%). According to a recent survey conducted by Ernst & Young (2006). If the reduction of the corporate tax rate from 15% to 10% in 2007 is taken into consideration. and almost the same percentage of investors recommend more flexible administrative procedures and less bureaucracy. 2007 Rome. are described as moderate. The results from our survey support these findings. The data show that for 23 percent of the foreign investors the most important developments in the Bulgarian business environment are related to improvements in transport network and telecommunication infrastructure.

the FDI inflows in the country are expected to increase significantly. Other recommended improvements are related to the quality of life. CONCLUSION Factors such as firm’s size. crate additional jobs and higher wages.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 while another 15 percent expect significant changes in the legal system and the fight with corruption and crime. transparency in business and government policies. low skilled labor costs and avoidance of trade barriers. unsatisfied local demand. type of investment (entry mode) and the sector to which it belongs play a decisive role in the company’s strategy to enter a foreign country. More that 110 large foreign companies have invested in Bulgaria during the period 1993 – 2006 with the total amount of invested capital of US$ 20 billion. In making long-term investment decisions. Italy 31 . and contribute significantly to the growth of gross domestic product (GDP) of the Bulgarian economy. efficiency. independence of political parties from business structures. financial aspects. The most important incentives for these companies to invest in Bulgaria are the opportunity for market growth. These companies are engaged in business activities that add value. market size. and implementation of the rule of law. If these recommendations are met in the years to come. Though most of the foreign MNEs do not have a formalized/institutionalized system for assessing and monitoring the host country risk. improve the quality and variety of products. Only 8 percent of the surveyed companies recommend changes in fiscal and taxation system that will stimulate foreign investments in Bulgaria. foreign companies assess the economic and financial components of the country risk as the most important factors /determinants/ of their FDI decisions. 2007 Rome. the individual projects risk assessment is a major part of their foreign investment decision making process. implementation of EU labor law. avoidance of trade barriers and October 13-14. A large number of small to midsize MNEs that have invested in Bulgaria in the same period find low labor cost of unskilled workers.

electricity. according to which most of the FDI in Southeast European countries have been concentrated in financial services. lack of local competition at the time of investment. chemical. petroleum. and mineral products Thus. Italy 32 . 2007 Rome. The prevailing mode of foreign market entry is acquisitions (mainly trough privatization). Other typical ways of investing are export (trough direct branches and subsidiaries) and contractual entry (trough manufacture and services contracts). or combination of two or more of them. followed by Greenfield investment and a limited number of joint ventures. and minimize competition risk. Other motives for foreign SMEs to invest in Bulgaria are their previous trade relations. October 13-14. and unsatisfied local demand for products. These findings are in compliance with the previous researches. metallurgy and metal products. Traditional sectors also continue to be among the most relevant targets for FDI expansion. we can conclude that a considerable share of FDI inflows in Bulgaria is committed to the sectors concentrated on satisfying local market needs. That is why the majority of foreign companies set up their FDI projects as local-market oriented in order to penetrate the domestic market. and water supply.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 links to neighboring countries as the most important factors in making long-term investment decisions. related to the distribution of FDI by economic activities. and manufacturing. telecommunications and trade. gas. with food and beverages and textiles sectors showing a particularly strong presence of small foreign companies. diversify the source of sale. increase their market share. rubber and plastic products. The largest number of FDI projects in Bulgaria has been implemented in sectors such as financial intermediation. In respect to different types of FDI. the horizontal FDI projects prevail as most of the foreign MNEs investing in transition economies intent to produce the same goods or services in multiple countries in order to serve the local market.

However. an influx of over € 11 billion from the EU cohesion and structural funds is expected for improvements in infrastructure. crime and corruption. 2007 Rome. and will continue to attract a significant amount of inward FDI. This places Bulgaria among the countries in the region with the highest amount of FDI inflows. bureaucracy and poor infrastructure discourage foreign investors and decrease the competitiveness of the Bulgarian economy. October 13-14. transport and other relevant sectors. after the Bulgaria’s accession to the European Union. Italy 33 . Now.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Factors such as incoherent and unstable legal system. the continuing economic growth and political stability are good signals that in the years to come Bulgaria will enjoy sustainable growth and development.

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imf.xls]. Investment incentives under the encouragement of investment act. [Available at http://www.org/ external/np/sta/fdi/eng/2003/102803. InvestBulgaria Agency (2006). 2007. 2007.pdf].pdf].investbg. Statistics report.europa. __________ (2007a). Foreign direct investment inflow in Bulgaria by type. 30. 31. 29. accessed February 28. Statistics report.orgfiles2/pdf/% 20ig2006/At_Glance. accessed January 28. Foreign direct investment in Bulgaria by sectors (in USD million).xls]. accessed February 28. [Available at http://epp.government. accessed February 25. 2007. accessed February 28.government. accessed April 21. [Available at http://investbg. __________ (2007b). Statistics report. International Monetary Fund (2003).eurostat. __________ (2007c).investbg. Southeast Europe Economic Forum (2006).7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 28.bg/ upfs/28/!FDI_Privat_Nonprivat_12. [Available at http://www. 34. [Available at http://www. Italy 37 . Foreign direct investment inflow in Bulgaria by country (in USD million).bg/upfs/28/!CountryYear12.government. [Available at http://www. accessed February 18. October 13-14.bg/ ?sid=18&ssid=46&c=81].government. [Available at http://www. European Union foreign direct investment yearbook 2006.biforum. 2007.07. 2007 Rome. 2007.07.bg/]. Statistics department report.eu/pls/portal/url/page/PGPQUEEN/PGE_QUEEN_TREE? screen=welcomeref&open=/&product=yearlies_new_economy&depth=3]. 2007. Record growth in 2006 of foreign direct investment in Bulgaria. 32.06_3. 2007.xls]. accessed February 28.06_3. [Available at http://www.ec.government. Foreign direct investment trends and statistics. Eurostat (2006). Statistics report. Southeastern investment guide 2006.07.06_3.bg/upfs/28/!SECTORS%2098-12. 2007. __________ (2007d). 31 October – 01 November.investbg. 35. 33.investbg.

2006. Chapter 3.asp? docid=7431&intItemID=2068&lang=1&mode=highlights].pdf].34233-BG. Report No. Bulgaria: the road to successful EU integration – the policy agenda. 37.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 36.unctad. Bulgaria: the road to successful EU integration – the policy agenda. 2006. Italy 38 . accessed December 18. accessed December 15. [Available at http://siteresources. World investment report 2006. [Available at http://www. Chapter 2. United Nations Conference on Trade and Development (2006). 38. [Available at http://siteresources. 2007 Rome. World Bank (2004a). accessed December 18. October 13-14.org/INTBULGARIA/Resources/BG_CEM_Chapt2.34233-BG. 2006.org/INTBULGARIA/Resources/BG_CEM_Chapt2.org/Templates/webflyer. Report No.pdf].worldbank. worldbank. __________ (2004b).

6 2.6 26. Italy 39 .0 0.9 969.8 33.6 94.1 72.0 180.7 27.4 29.096.0 13.0 76.0 818.790.7 100.7 97.9 3.9 Source: InvestBulgaria Agency (2007a).7 36.8 421.7 2.5 19.1 18.1 17.216.6 839.2 Greenfield + Expansion USD million % 34.4 1.5 76.8 226.8 81.2 215.6 84.6 1.2 63.6 34.4 636.6 256.8 1.107.8 Total by year USD million 34.8 404. 2007 Rome.3 3.2 214.0 36.5 812.0 22.227.3 0.0 267.2 620.8 82.7 15.4 102.3 635.4 210.4 364.5 134.4 136.0 70.5 5.0 16.4 64.883. October 13-14.7 366.0 21.2 2.0 4.7 2.485.5 793.7 86.622.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Table 1: FDI inflows in Bulgaria by type of investment Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total Privatisation USD million % 0.1 19.0 80.443.9 162.0 0.058.001.4 78.2 592.4 66.732.4 100.7 5.883.4 2.4 65.5 63.4 130.0 35.

3 0.9 8.9 7.6 1.1 0.8 4.9 4.8 6.6 1.2 16.5 2.3 2.8 6.1 10.8 1.1 3.6 3.8 0.8 3.1 1.4 4.0 1999 7.5 6.9 2.5 3.0 1.7 0.5 2.2 3.9 4.7 2.7 8.3 5.5 3.5 2. by country Country Bulgaria Romania Estonia Lithuania Check Republic Slovakia Croatia Latvia Hungary Ukraine Poland Slovenia Russia 1998 4.6 2005 10.8 11.5 3.3 2004 13.0 2001 5.9 2006 16.2 9.1 1.4 6.5 4.9 5.2 2.0 2003 10.0 4.6 21.9 5.2 Source: 1998-2000: Bank Austria Creditanstalt. 2007 Rome.4 4.4 3.3 3.9 2.9 0.0 4.3 9.0 3.5 7.9 2. 2001-2006 .1 8.4 1.6 8.0 8.4 5.2 4.6 1.6 2.Bulgarian National Bank.9 2.4 4.8 7.8 6.7 2.4 4.7 5.3 4.5 0.5 2.9 7.8 2002 5.9 4.0 3.2 1.3 3.9 3.4 1.1 2.8 5.3 1.8 10.0 3.2 9.2 4.2 8.2 2.7 2000 8.4 9.0 7.3 7.1 3.9 2.9 9.0 2.0 1.5 2.2 1.2 8.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Table 2: FDI Inflows as a percentage of GDP.2 4.3 12. October 13-14.8 3.9 4. Italy 40 .5 1.2 4.1 3.9 2.

7 0. October 13-14.7 -4.403 1.2 0.2566 539.6 20.577 13.388 -13 7.240 41 2005 2.209 466 56.624 9.4 0.159 20.3 0.2 0.6 1.3 7.802.056 916.725 2005 9.170 SEE and the inward 0 121 70.435 Source: United Nations Conference on Trade and Development (2006).739 10.732 49.606 196 51.3 5.500 222.127 23.3 8.5 6.6 8.277 778.9 28.3 5.1 12.877 55 589 5.7 8.562 2.104 2004 3443 -217 1262 348 6517 70 1.3 0.9 17.9 Bulgaria Croatia Romania Russian Federation Southeast Europe SEE and the Independent States World FDI Stocks inward outward inward outward inward outward inward outward inward outward inward outward inward outward 1980 1990 2000 inward 0 112 2.9 7.0 1. 2007 Rome.731 557.213 51 539 656 144 2 16 423 693 8 -5 1.3 0.9 23.306 Independent States outward 0 191 22.3 22.6 7.083 outward 0 191 1.1 0.887 10.401 4.2 0.6 0.1 0.603 3.0 19.2 12.424 13 8.303 5.869 as a percentage of gross Fixed Capital Formation 1990-2000 2003 2004 2005 (annual average) 18.5 18.818 242 17.5 17.8 33.523 294 9.933 outward 571.2 1.516 2.097 27 2.4 0.0 4.2 0.471.8 34.220 0 12.2 6.7 9.7 7.6 7.0 12.713 126.1 0.602 2.544.226 1.257 outward 0 124 87 Croatia inward 0 0 3.4 1.9 37.715 4 13.679 15.5 15.3 1.1 25. Italy Bulgaria .789.3 68.1 54.7 0.1 0.6 10.2 5.687 49.9 20.6 0.4 1.973 710.808 275 12.0 0.5 0.8 21.2 0.4 14.791.3 3.283 201 39.869 561.5 25.486 111.2 25.325.2 0.4 17.6 6.129.0 0.2 16.4 0.911 1.3 0.0 0.445 496 39.092 6.4 9.875 outward 0 0 170 Southeast Europe inward 0 112 15.7 0.457 174 24.8 21.5391 617. and in percentage FDI flows 1990-2000 2002 (annual average) 301 905 -4 29 544 1.068 2004 9.3 as a percentage of GDP 1990 2000 2004 2005 0.8 11.223 316 1.5 1.523 outward 0 0 825 Romania inward 0 0 6.0 13.7 45.1 26.569 12.480 outward 0 66 136 Russian Federation inward 0 0 3.0 0.7 0.1 35.0 17.133 108 2.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Table 3: FDI flows by country and by year.345 10.0 0.1 36.0 0.4 7.2 13.1 5.2 15.173 127 12.7 9.261 2.7 33.054 World inward 561.5 0.213 39 1.4 -0.2 23.695 187 6.5 28.4 39. in USD million.0 1.2 16.540 2003 2.7 26.6 29.671.6 7.2 1.192 10.0 24.1 10.755 813.3 23.625 255.

9 0.7 7.1 13.0 16.6 -1.0 120.8 31.2 678.9 28.8 1994 14.5 1.2 49.3 0.0 2.4 83.9 9.0 0.6 142.5 23.2 60.6 8.0 0.4 38.0 0.7 28.8 33.0 5.1 55.3 7.3 14.4 7.4 0.5 49.4 0.4 21.1 0.5 24.3 176.2 2.4 -3.3 16.1 47.5 4.5 10.8 2.6 4.2 0.1 73.7 15.6 224.4 0.6 8.5 58.1 5.5 45.4 9.4 2.5 1.2 53.8 -2.0 -0.5 56.7 49.2 2.3 0.9 84.1 3.5 0.6 12.3 17.9 0.8 12.8 16.7 39.2 0.4 49.8 4.0 0.3 2.5 95.8 71.1 13.1 1993 1.3 58.1 70.4 111.3 1.4 58.1 23.9 1.4 100.2 44.3 872.0 0.8 0.7 73.8 8.2 5.2 0.8 13.8 3.1 4.1 -0.8 -8.1 30.5 14.2 10.3 -3.0 161.4 0.2 2.5 19.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Table 4: FDI inflows in Bulgaria by country of origin and by year.5 1.9 2005 900.9 5.3 0.1 24.9 2006 Total by Country 554.1 0.3 2.2 6.5 1998 1999 2000 2001 2002 2003 238.1 8.9 2.8 8.8 18.4 55.6 20.6 56.7 16.0 1.2 128.2 -0.0 15. in USD million No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Country AUSTRIA NETHERLANDS GREECE UK GERMANY BELGIUM & LUXEMBOURG ITALY HUNGARY USA CYPRUS CZECH REPUBLIC SWITZERLAND IRELAND SPAIN FRANCE RUSSIA TURKEY DENMARK ISRAEL SWEDEN JAPAN MALTA LIECHTENSTEIN CANADA PANAMA SLOVENIA LATVIA ROMANIA LITHUANIA ICELAND ESTONIA NORWAY LEBANON CHINA SLOVAKIA October 13-14.1 0.7 -1.2 -5.7 256.9 29.3 1.7 29.3 0.1 10.0 0. Italy 1992 13.3 20.6 105.2 7.8 21.0 5.6 22.6 3.6 0.1 7.1 3.5 42 0.0 0.0 9.8 144.5 6.8 0.0 14.9 50.7 37.1 40.9 0.5 3.8 0.0 6.3 11.2 10.1 8.0 2.1 1997 12.3 1.5 4.2 6.1 0.7 128.4 25.9 1.3 0.1 0.8 91.3 177.3 335. 2007 Rome.721.3 10.2 34.9 255.9 74.7 33.2 2.4 1.9 7.0 1.1 331.1 0.3 30.0 1.0 12.8 4.2 0.7 30.2 12.3 105.6 8.5 25.7 2004 908.7 28.9 293.3 1.8 35.6 1.6 96.6 21.8 0.1 8.2 0.1 240.1 0.6 0.6 -24.3 142.217.9 1.0 67.7 45.1 0.2 61.2 104..2 6.0 0.3 23.2 28.7 6.6 55.9 -6.1 0.3 0.4 4.1 0.2 298.8 -0.4 0.7 109.9 0.6 160.6 0.6 -10.0 16.1 0.1 20.2 0.1 18.8 2.1 1.4 5.8 262.5 -4.2 14.4 49.6 943.4 0.6 62.9 67.8 56.2 239.1 1995 1.6 0.4 -9.4 862.9 17.6 115.4 17.1 16.7 0.1 4.1 0.1 0.1 0.4 85.2 5.9 119.0 1996 12.0 0.4 -21.1 0.2 679.1 15.0 4.0 0.4 0.2 1.2 0.1 10.3 0.0 46.5 5.7 2.1 0.2 456.2 0.4 242.5 36.0 243.8 0.6 56.4 842.9 -5.4 104.1 46.6 54.6 2.1 -0.7 0.2 0.3 5.6 329.8 99.2 1.8 3.3 109.7 40.6 40.0 0.5 31.0 0.9 1.8 9.1 0.4 255.0 822.0 1.0 1.7 37.5 379.6 0.5 6.8 29.3 53.5 93.9 327.3 100.6 0.8 14.2 0.9 0.1 6.2 .3 3.9 357.1 1.7 0.2 2.1 0.8 109.1 0.1 0.4 116.2 27.9 99.5 21.7 92.0 6.7 31.3 1.2 0.8 4.2 0.1 46.2 74.1 0.1 108.6 7.2 9.5 1.7 7.5 6.2 305.5 373.4 1.3 775.0 9.3 146.0 94.7 1.0 0.7 47.0 1.9 15.2 80.6 0.1 36.5 35.7 1.1 14.3 338.9 6.5 2.4 12.5 22.9 145.9 0.0 2.5 154.7 1.5 -3.0 16.4 78.0 -0.6 3.1 1.4 63.7 945.9 205.9 -1.1 2.0 465.102.4 0.2 0.9 0.2 0.6 41.0 15.509.7 150.4 9.5 1.1 6.937.1 0.8 17.9 3.4 0.4 0.6 20.1 2.4 5.9 0.0 0.

9 -3. 2007 Rome.6 -0.7 2.9 162.001.6 256.4 102.4 Source: InvestBulgaria Agency (2007c).9 969.1 0.9 3. 210.1 8.2 620.6 ISBN : 978-0-9742114-9-7 1.6 1.0 818.5 812.4 0.8 1.7th Global Conference on Business & Economics 36 POLAND Total by years 34.7 5.107.2 6.096.9 1.9 October 13-14.8 19.4 636.443. Italy 43 .1 -0.883.058.4 2.

4 13.2 -0.7 2.5 1.4 20.9 -11.0 1.5 21.9 50.1 18.5 2005 813.8 20.8 72.8 72.3 37.7 9.0 85.288.8 205.6 61.9 2.4 21.6 Source: InvestBulgaria Agency (2007b).7 14.5 2.2 17.1 2006 Total by sector 906. electronics.6 212.5 6.0 -118.9 8. chemical.4 66.4 11.9 485.4 33.3 24.8 35.8 23. 2007 Rome.9 1999 97.9 10.6 55.1 0.6 15.9 33.7 0.0 -18.1 182.7 13.9 2.6 -0. Italy 44 .2 169.3 1.5 -0.6 2.5 401. in USD million No 1 2 3 4 6 5 7 13 8 9 11 10 12 14 15 16 17 18 19 20 Sector Financial intermediation Trade and repairs Real estate and business activities Petroleum.5 0.9 25. glass.9 45.5 17.7 141. computers Mining Agriculture.8 32.8 134.9 -2.1 935.1 127.) Food products Hotels and restaurants Textile and clothing Machine building Wood products.3 5.6 133.1 17.5 2.7 295.2 11.1 3.7 -0.1 69.7 229.9 256.9 364.6 27.1 10.2 601.2 0.0 180.0 27.1 19.7 38.5 20.2 45.398.2 2.7 79.2 5.9 27.0 39.6 143.5 15.0 17.6 0.6 31.1 28.3 572.1 1.043.2 0.7 5.2 37.2 13.0 3. gas and water supply Telecommunications Construction Metallurgy and metal products Mineral products (cement.9 84.5 39.7 502. October 13-14.0 1.5 -9.0 7.4 232.0 5.0 -159.8 121.1 2004 238.4 662.6 76.4 0.2 56.2 2003 501.7 2000 4494 116.6 2.622.9 4.0 16. forestry and fishing Leather and leather products Vehicles and other transport equipment 1998 150.0 6.1 29.3 64.3 -6.5 0.1 28.5 67.2 71.7 41.1 19.3 6.0 269.1 66.4 523.2 4.5 0.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Table 5: FDI in Bulgaria by sectors.378.3 189.2 150.8 12.9 236.6 4.6 14.0 2001 2002 122.1 0.4 53.5 97.0 54.0 293.8 2.7 8.7 2.9 47.3 13.7 270.8 87.1 7.7 19.9 7.4 2.1 2.6 71.0 24.8 7.8 1.6 1.5 5.7 16.414.1 81.8 1579.0 0.1 925.9 17.7 26. rubber and plastic products Electricity.9 2.7 165.9 -3.9 57.1 97..0 13.2 2. paper Transport Electrical eng.6 12.8 669.9 17.3 21.6 29.3 43. etc.8 -0..5 23.1 247.7 559.7 -3.1 -1.8 255.7 37.5 111.

7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Table 6: Foreign companies by country of origin. Italy 45 . 1993 -2006 Country of origin Germany Austria USA Greece Cyprus Italy Great Britain Turkey Belgium Switzerland The Netherlands Czech republic France Spain Luxemburg Sweden Russia Hungary Japan Denmark Iceland Canada South Korea Malta Slovakia Panama Lebanon Slovenia United Arab Emirates Ireland Top 90 companies (more than BGN 10 million) 17 13 7 7 1 6 4 2 4 5 2 2 3 2 2 2 2 1 1 1 1 1 1 1 0 0 0 1 1 0 90 Other companies (less than BGN 10 million 8 2 6 2 4 2 1 4 2 1 1 1 0 1 0 0 0 1 1 0 0 0 0 0 1 2 1 0 0 1 42 TOTAL 25 15 13 9 5 8 5 6 6 6 3 3 3 3 2 2 2 2 2 1 1 1 1 1 1 2 1 1 1 1 132 Source: InvestBulgaria Agency and Author calculations. October 13-14. 2007 Rome.

2006 Greenfield and Expansion 3 6 3 8 11 38 42 65 68 53 55 42 53 19 466 Acquisition (through privatization) 1 4 5 9 25 16 18 7 5 3 1 5 2 0 101 Mixed (Greenfield + acquisition) 0 0 0 0 0 0 2 0 0 2 1 0 0 0 5 Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total 4 10 8 17 36 54 62 72 73 58 57 47 55 19 572 Source: InvestBulgaria Agency and Author calculations. 2007 Rome.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Table 7: FDI projects by type of investment. October 13-14. Italy 46 . 1993 .

) 40 (existing 4000) 400 (existing 900) 1500 (existing 1000) 180 100 240 320 Source: InvestBulgaria Agency and Author calculations.Murgash Develoing a golf pitch Eestablishing a new textile factory Sports and tourist center .USA Cumerio .7 71.4 73.Turkey AES Corporation .7 185. 2004 -2006 Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Investor Linder holding .0 106.0 235.0 42.France Asarel Medet MO Sofia AD .Dolna banya Tokushukay hospital .Japan Libher-Housgrete Maritza AD Karfur Bulgaria AD Petromax refinery Bulgaria Greentech .Israel Bulnet .0 260.0 82.Perelik Apriltzi country club Building a golf pitch .0 31.0 73.0 140.Spain Kaufland Bulgaria EOOD Hit immobilen Sofia EOOD Shnaider elektrik Bulgaria EOOD Investment project Business park Sofia Modernization of the "Chelopech" mine Project "Krumovgrad" Automative parts enterprice Modernization of Asarel Medet AD Mall of Sofia Decorative roses greenhouse Glass production New power station "Maritza Iztok" 1 Developing a new coper rafinery Wind-power generator .0 80.0 20.0 17.Italy Alpha Finance holding Alpha Finance holding Golf club Ibur AD Tokushukay Medical corporation .Devnya Business park Varna Black sea golf & country club Building a ski zone . Italy .0 156.Germany Dundee precious metrals .Denmark Solvay Sody AD .Belgium Business park Varna AD Kabland OOD Dobrinishte ski EOOD Keros .Godech Heat-electric power station .7 127. 6300 indirect 60 (existing 760) 250 .Dobrinishte Tile production plant Kaufland-Hypermarket Mladost Hit Hypermarket Dobrich Building a new plant for electric machinery 47 Investment in million leva (BGN) 163. October 13-14.0 138.0 92.0 New work positions created 120 direct.0 263.Spain Miroglio .Japan Mitsubishi heavy industries .8 160.0 71.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Table 8: FDI projects and new jobs created.Canada Montupe .6 113.6 101.Sofia Kaliakra wind power AD Expanding the refrigerator production Hypermarket and trade center Oil rafinery .Canada Dundee precious metrals .0 75.Silistra Wind-power generator .0 97.Belgium Exos energy EOOD Ferrie group .0 113.The Netherlands Shishedjam . 2007 Rome.6 366.7 2049.8 120.300 700 35 (total of 1275) 1000 240 1065 200 (existing 2000) 70 23 600 500 145 40 150 1000 30 (existing 250) 600 2280 300 (existing 1000) 60 5 (min.

261 0.632 0.305 -0.177 0.019 0.941 1.130 -0.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Table 9: Statistical results from one sample Т.463 -0.061 0.275 0.056 0.828 1.478 0. Italy 95% Confidence Interval of the Difference Sig.270 1.212 2.734 0.286 0.833 -0.151 6.056 1.256 0.106 0.233 1.529 0.772 0.382 1.062 0.111 0.test of country risk factors Test Value = 3 Factors Group 1 Risk attached to the investment Opportunities arising from the investment Costs attached to the investment Profits arising from the investment Group 2 High investment risk Incoherent and unstable legal system Unpredictability of laws and regulations Crime and corruption Political instability Bureaucracy Excessive taxation.117 0.333 0.972 0.357 -0. including criminal activity at present Deliberate changes in economic policy at present Violation of law at present Changes of government at present Political instability at present Group 7 Internal insecurity.118 -0. high value-added taxes Macroeconomic instability High inflation rates Unskilled labor force Group 3 S&P rating group Moody's investor services World bank information services Economist intelligence unit Group 4 Political risk Economic risk Financial risk Cultural risk Group 5 Political risk in transition economies Economic risk in transition economies Financial risk in transition economies Cultural risk in transition economies Group 6 Internal insecurity.219 1.855 -0.046 1.463 -1.043 1.455 0.390 0.139 Upper 1.498 10.530 0.150 -0.647 1.001 0.769 0.459 -0.024 0.570 1.166 0.033 0.792 2.700 0.835 0.197 0.722 0.552 0.496 0.011 0.164 1.559 -0.242 -0.763 0.949 2.001 0.444 0.950 0.633 1.252 1.233 0.950 1.639 0.802 2.722 0.600 0.100 0.569 -0.017 1.300 0.590 df Lower 0.235 0.614 0.458 0.697 3.001 0.145 0.439 0.117 1.012 0.611 0.550 -0.015 1.326 -0.158 0.335 48 .053 1.483 2. 5.500 0.364 0.700 0.725 4.750 0.001 0.585 0.001 0.091 0.001 0.345 0.345 1.833 1.636 0.332 0.111 0.447 1.441 1.789 0.705 1.174 1.059 0.054 1.831 0.010 1.088 0.483 1.030 -0.007 0.041 -0.513 -0.895 0.066 0.001 0.236 3.405 1.070 0.635 0.073 3.928 4.083 -0. including criminal activity in next 5 years Violation of law in the next 5 years Deliberate changes in economic policy in the next 5 years Political instability in the next 5 years Changes of government in the next 5 years Group 8 Infrastructure deficiencies at present Bureaucratic impediments at present October 13-14.333 0.102 1.734 1.972 1.163 0.200 0.056 0.791 1.242 1.018 1.188 -0.037 1.112 -0.853 0.376 1.871 0.278 0.657 -0.844 1.389 0.057 -0.500 1.264 0.300 1.110 1.486 0.444 0.037 0.267 0.508 1.000 2.514 0. 2007 Rome.529 0.450 0.737 t-stat.174 -0.019 0.917 1.199 -0. (2Mean tailed) Difference 38 38 38 38 38 38 38 36 36 38 38 38 34 38 22 20 20 20 38 38 38 34 34 34 34 32 34 34 34 34 34 34 34 34 34 32 36 36 0.333 1.001 0.983 2.462 0.686 1.221 -0.017 0.392 2.409 2.855 4.023 0.500 0.

028 -0.056 0.710 1.733 -0.590 0.421 0.421 0.034 -0.092 0.399 0.042 0.563 0.512 -0.065 0.050 1.007 0.789 -0.368 0.416 3.909 -0.462 -0.217 1.848 0.842 0.650 0.474 0.744 1.615 0.737 0. including a deterioration of GDP in the next 5 years Deficit in current balance of payments in the next 5 years Group 10 Frequent changes in fiscal and tax policy at present Stability of bank system at present Restrictions/dificulties on access to credit and capital markets at present Liquidity of capital markets at present Vulnerability in credit rating at present Group 11 Frequent changes in fiscal and tax policy in next 5 years Stability of bank system in next 5 years Restrictions/dificulties on access to credit and capital markets in next 5 years Vulnerability in credit rating in next 5 years Group 12 Corrpution and nepotism at present Language barriers at present Ethic/religeous differences or tensions at present Differences in negotiation styles at present Ignorance of the patterns of business behavior at present Group 13 Corruption and nepotism in next 5 years Ignorance of the patterns of business behavior in next 5 years Ethic/religeous differences or tensions in next 5 years Language barriers in next 5 years Differences in negotiation styles in next 5 years Group 14 Following the client's theory Market growth Market size Efficiency Geographical proximity Links to other neighbour countries Financial aspects Low skilled labor costs Avoidance of trade barriers Establishing an export base Low unskilled labor costs Unsatisfied local demand for products October 13-14.910 0.494 0.615 0.105 -0.345 -0.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 High inflation rates at present Slower economic growth.326 0.526 -0.696 0.600 0.937 0.421 -0.044 0.349 2.282 1.137 -0.000 0.000 0.030 0.389 0.275 1.701 0.632 0.118 0.449 0.000 0.400 0.111 -0.583 -0.368 0.482 -0.090 -0.697 -0.059 0.421 0.509 0.376 0.633 0.002 0.211 -0.232 1.333 0.846 -0.038 0.211 -0.706 0.001 0.035 0.535 0.053 0.717 1.202 1.095 0.118 0.059 -0.522 -0.424 0.278 0.235 -0.035 0.707 0.882 2.746 -0.789 0.203 0.176 0.312 0.305 0.674 0.865 -0.000 0.482 0.842 0.236 2.171 0.237 -0.937 1.721 -0.482 0.383 -1.000 0.000 0.105 0.000 0.105 -0.490 0.158 -0.216 -0.158 0.615 -0.638 -0.501 0.009 -0.903 -0.104 0.525 2.842 0.000 0.208 0.319 0. including a deterioration of GDP at present Deficit in current balance of payments at present Group 9 Infrastructure deficiencies in next 5 years Bureaucratic impediments in next 5 years High inflation rates in next 5 years Slower economic growth.158 0.243 -0.407 3.381 1.105 -0.072 0.845 -1.501 2.408 0.714 1.009 0.398 2.347 -0.584 0.095 -0.638 0.383 -0.750 -0.038 -0.231 0.425 0.884 0.203 34 32 32 34 36 36 34 32 36 36 36 34 34 36 36 36 34 36 36 36 36 36 36 36 36 36 36 36 36 38 36 36 36 36 38 36 34 36 32 49 1. Italy 0.682 0.042 -0.204 1.806 -0.233 0.282 2.683 0.667 0.336 0.374 -0.974 0.916 1.243 3.910 0.104 0.047 0.356 1. 2007 Rome.474 0.104 0.557 .682 0.417 1.697 -1.636 -0.022 0.472 -0.135 1.546 0.890 0.000 0.194 0.615 1.723 -0.232 0.010 0.899 0.118 0.734 0.789 -0.260 1.405 0.714 2.263 -0.952 0.

in USD million Albania Bosnia and Herzegovina Bulgaria Croatia Greece Macedonia Moldova Romania Serbia and Montenegro Slovenia Turkey 0 1 870 2 268 18 598 15 185 23 758 2 473 2 541 32 639 9 014 5 392 43 849 10 000 20 000 30 000 40 000 50 000 60 000 70 000 1996-2000 2001-2006 80 000 90 000 100 000 Source: SEE Europe Investment Guide (2006) and Author calculations.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Figure 1: Total FDI inflows in Southeast Europe. 2007 Rome. October 13-14. Italy 50 .

right scale) Source: 1998 to 2004: Bank Austria Creditanstalt.10% 5.90% 5.80% 15 000 8% 6% 4% 2% 0% 1998 4.50% 13.90% 10 000 5 000 0 1999 2000 2001 2002 2003 2004 2005 2006 FDI Inflows/GDP. 2007 Rome. 2002 – 2006: Bulgarian National Bank. % Cumulated FDI (since 1993.60% 25 000 20 000 10. October 13-14. .10% 10.90% 16.50% 7.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Figure 2: FDI in Bulgaria as % of GDP/cumulative FDI by year 18% 16% 14% 12% 10% 8. Italy 51 . USD mn.

chemical. October 13-14. Italy 52 .7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Figure 3: Total FDI projects by sectors. 2007 Rome. rubber and plastic products Food products Others Financial intermediation 0 5 10 15 20 25 30 35 40 45 50 55 60 65 2 4 5 7 8 10 13 16 17 22 23 28 29 31 40 41 48 number of projects per industry 50 51 59 68 70 75 Source: InvestBulgaria Agency and Author calculations. electrical engeneering and computers Mineral products Machine building Wood products and paper Hotels/Restaurants Metallurgy and metal products Textile and clothing Trade and repairs Petroleum. 1993-2006 Pharmaceutical Tobacco Transport Mass media Mining Real estate and business activities Telecommunications Electricity/Energy Construction Electronics.

2004-2006 2500 Investment in USD million per project New w ork positions created per project 2 280 2000 1 500 1500 1 065 1000 700 1 000 1 000 600 500 120 60 0 1 2 3 4 5 6 7 8 250 35 200 240 70 23 145 40 150 30 500 600 400 300 60 5 40 180 320 240 100 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Number of projects implemented in the period 2004-2006 Source: InvestBulgaria Agency and Author calculations. October 13-14. Italy 53 . 2007 Rome.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Figure 4: New jobs created by FDI projects.

October 13-14. 2007 Rome.7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Figure 5: Most important entry barriers to FDI inflows in Bulgaria Limited purchasing power Unskilled labor force Behavior against consumption and labor Unfair competition High inflation rates Marcoeconomic instability Excessive taxation Crime and corruption Unpredictability of of law and regulations Bureaucracy Political instabiltiy Incoherent and unstable legal system High investment risk 0% 5% 10% 15% 20% 25% 30% 35% 20% 25% 35% 40% 40% 45% 10% 15% 15% 20% 20% 25% 30% 10% 15% Source: Author’s questionnaire research. Italy 54 .

Italy M 30% 25% 25% 20% 7th Global Conference on Business & Economics Source: Author’s questionnaire research. 2007 Rome.Fo l lo w in g th e cl ie nt 's 10% 15% 20% 25% 30% 35% 0% 5% October 13-14. 20% 15% 15% Figure 6: Most important incentives to FDI inflows in Bulgaria 55 15% 10% 10% 10% 10% 10% th eo ry ar ke tg ro w th M ar ke ts iz e Ef f ic Fi ie na nc nc y Lo ia w la sk sp ille Av ec d oi ts da la b nc or e Es co of st ta tra s bl is de hi ba ng rri Li an er nk s ex G s e p to og or ot t r ap ba he hi se rn ca ei l gh pr bo ox U ns im ur Lo ai in ity tis g w co fie un d un s kil lo t ri ca le es d ld l a em bo an rc ds os La ts f ro ck p of ro du lo ca ct lc s om Ac p qu et iti is to iti n on of as se ts ISBN : 978-0-9742114-9-7 5% .

7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 Figure 7: Foreign investors’ entry modes into Bulgaria Joint venture 2.0% 15.7% Export 22. 2007 Rome.3% Greenfield 16.0% 10.0% 5.0% 35.0% 25. Italy 56 . October 13-14.0% Source: Author’s questionnaire research.0% 20.9% Contractual entry 22.2% 30.1% Portfolio investment 6.0% 29.9% Mergers and acquisitions 0.

Italy 57 .7th Global Conference on Business & Economics ISBN : 978-0-9742114-9-7 October 13-14. 2007 Rome.

and last amended in 2005. The typical way of constructing an index is the usage of sub-indexes. and Turkey – amounted to only 3% of all the FDI outflows from the member EU countries. the privatized companies have to comply with the Privatization and Post-Privatization Control Act. The same research points out that vertical FDI occurs most frequently between countries with different factor endowments. 5 Blaźić and Vlahinić-Dizdarević (2006) find that the horizontal model produces economies of scale for the multinational enterprise and is a major source of its advantage over domestic ones. 11 Another important point here is that through this process the amount of investment does not increase.1 2 See International Monetary Fund (2003). it is just one of the many factors to be considered by foreign investors in making foreign investment decisions. but just the ownership of the already existing enterprises is transferred to private foreign investors. 13 See Mateev and Stoyanov (2007). first voted in 2002. Bulgaria occupies the second place with 217 job positions per project.investment over BGN 70 million. p. 16 We thank to Prof. Among the Southeastern European /SEE/ countries. This enables the comparison between the levels of country risk in different countries. is supported by Deichmann (2001) earlier research.6. 21 This complies with Bitzenis (2006b) finding that 33 percent of Greece MNEs that invested in Bulgaria before 2000 had exploited the existing business links with Bulgaria and used their FDI to establish an export base. Romania. namely that trade integration is the most significant of all variables. 17 By project we mean the investment made by a foreign MNE in each year of the observation period (1993 – 2006). and if yes. whose goal is to offer investors condensed information about the level of uncertainty in host economies. Colin White for providing us the questionnaire used in this research. 18 As the Ernst & Young (2006) survey shows Bulgaria is still behind most of the European countries in respect to the total number of new job positions created by FDI inflows. The class thresholds are set forth in the Rules on the Enforcement of the Encouragement of Investment Act (2004) as follows: first class . depending on the investment project’s size. p. and third class .investment from BGN 10 million to 40 million.Bulgaria. 9 See InvestBulgaria Agency (2006) report. 12 The total amount of FDI in the region is approximately € 60 billion for the period 2001 – 2005. 4 In the presence of uncertainty the opportunity of postponing the investment and waiting for additional information could be highly valuable. financial and political risk.1. p. which mode of entry should be chosen. due to the increased FDI barriers in Bulgaria and in other CEE countries.4.investment from BGN 40 million to BGN 70 million. and suggest several ways of measuring the risk premium that a foreign investor would require. 10 At the same time. 2006). Damodaran (2003) points out some major pitfalls connected with the usage of indexes. followed by Turkey and Serbia. p. which was by far the highest ratio of the whole CEE region. 7 Vlahinić-Dizdarević and Biljan-August (2005) find that the most important determinant that had influenced the choice of FDI destination in Southeastern Europe in the period 1996-2003 was the progress in privatization in these countries. the EU members decreased their total foreign investments in the period between 2003 and 2004. second class . In this way ownership advantages such as patents would be treated as a quasi-monopoly and makes investments to delay. The stages of production are located in different countries to take advantage of the local resources or different factor prices. and is explained by the fact that trade and investments complement each other. 6 This finding. measuring economic. . In terms of average number of job positions per FDI project Romania ranks first. 20 The value of 3 serves as a critical test value because according to the chosen rating scale of the relevance of different impact factors this is the point where a factor is neither of high or low significance. where 1 means that the factor is of no importance.51. 19 Each of the factors is ranked on the scale of 1 to 5. 22 See Semkova (2007).6. by which he derives an econometric specification of the investor’s decision whether to enter the foreign market at all. and 5 – of great importance. 14 See Eurocapital Finance (2006). Croatia. p. Therefore market entry should be expected to occur later. making a threefold increase compared to the previous five-year period (see Southeast Europe Economic Forum. According to Eurostat Yearbook (2006) by 2004 the FDI inflows from EU countries to the candidate member countries . 15 The foreign investors are grouped in three classes. Hauser (2005) suggests the usage of country risk indexes as a measure to country risk. 3 Hauser (2005) has also constructed a model. 8 According to Gertchev (2006) the average FDI flows for the period 1997-2004 amounted for 42% of the gross fixed capital formation. In addition.

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