Explanatory Variables For Low Western Investment Interest in Bulgaria

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Explanatory Variables for Low Western Investment Interest in Bulgaria
Article in Eastern European Economics · November 2004

DOI: 10.1080/00128775.2004.11041091 · Source: RePEc
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Aristidis P. Bitzenis
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Eastern European Economics, vol. 42, no. 6, November–December 2004, pp. 5–38.
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ISSN 0012–8775/2004 $9.50 + 0.00.
ARISTIDIS BITZENIS
Explanatory Variables for Low Western

Investment Interest in Bulgaria
ABSTRACT: The understanding of a country’s past is important in the process

of analyzing a country’s present. Through the study of Bulgarian history, the
researcher developed a relatively good understanding of the country’s image at
the beginning of the period in question (1989–2002). The evidence supports the
unexpected finding that historical links do not affect a company’s decision to
invest in another country. Furthermore, there is support for the conclusion that
political unwillingness to make significant reforms together with the inefficiency
of the post-communist Bulgarian government rather than Bulgarian political
instability led to delays in structural reform and delayed progress in privatization,
limited foreign direct investment (FDI) inflows, and thus to a delay in the overall
Bulgarian transition process. Moreover, the cultural closeness and/or distance
of multinational enterprises’ (MNEs’) countries of origin vis-à-vis the host
country remain questionable, and they have been used either as incentives or
as obstacles to MNEs’ investment decisions depending on the specific indus-
tries and on the specific products. On the other hand, the geographical dis-
tance of Bulgaria from advanced Western countries is an important barrier
that partially explains low Western investment interest in Bulgaria.
The understanding of a country’s past is important in the process of analyzing

a country’s present. The study of Bulgarian history provides a relatively good
understanding of the country’s image at the beginning of the period in ques-
tion (1989–2002). This image is based on many of the characteristics that,
according to theorists, a company examines before deciding to undertake a
foreign direct investment (FDI) project in a certain country. One of these
The author is a lecturer at City College in Thessaloniki, Greece, an affiliate of the

University of Sheffield, UK.
5
6 EASTERN EUROPEAN ECONOMICS
considerations is the social and cultural characteristics of the population and

whether citizens are “compatible” with the product and the company profile.
Another is the economic and political stability of the country and the
government’s attitude toward foreign investors in terms of regulations. Evi-
dence was also found both for and against the question of whether historical
links affect a company’s decision to invest in another country. Whatever the
result, the history of a nation is a far from trivial matter, even when examining
recent economic data, because there are many examples of recent decisions
based on historical experience.
In this article, a question arises about whether political instability in Bul-
garia or the inability, or even the unwillingness, of government to make reforms
and changes during the post-communist period led to a delay in Bulgarian
structural reform, privatization progress, and restructuring of state-owned
enterprises, and thus to limited FDI inflows (Bitzenis 2003a). Moreover, the
legacy of the communist regime in Bulgaria created unfavorable conditions
for the transition to a market economy. In 1989, Bulgaria was an industrial-
ized country that produced low-quality products that were distributed to the
Council for Mutual Economic Assistance (CMEA) countries and the Soviet
Union. The collapse of both markets created a lack of foreign trade partners.
Therefore, it was necessary to find new partners as well as to make changes in
the composition and the geographical distribution of the commodities pro-
duced. The transition to a market economy was not easy. The unfavorable
initial economic conditions, a legacy of the communist regime, led to a lag in
the country’s economic development. A general transformation of the eco-
nomic policies, laws, and regulations of the country was needed. A transition
process includes stabilization programs, structural reform, and liberalization
of trade, prices, and exchange rates, and privatization and restructuring of the
state-owned enterprises. Because of the difficulties of and the delay in the
Bulgarian transition, FDI inflows were limited, especially in the first years of
transition (Bitzenis 2003b).
Bulgaria’s Historical Links with Greece, Germany, Turkey,

and Russia
Greece and Bulgaria have maintained a relationship for centuries, mainly be-
cause of the geographic proximity of the two countries, their cultural close-
ness, and their common religious beliefs. These Christian Orthodox countries
are historically connected by the Byzantine Empire and the occupation of the
Ottoman empire, which brought the two countries even closer.
Strong relations began in the late ninth century with the conversion of
NOVEMBER–DECEMBER 2004 7
Bulgarians to Christianity and the introduction of the Cyrillic alphabet, a way

of writing the Bulgarian language. The Cyrillic alphabet was created in response
to the need to educate the masses in their new faith and the demand for an
alphabet that would accommodate the spread of the new faith. The introduc-
tion of the Cyrillic alphabet is generally acknowledged to be the work of two
Greek-born monks from Thessaloniki, Cyril and Methodius, who were sent as
missionaries by the Christian church. The special contribution of the Greeks
and their role in introducing the alphabet established a special bond between
the two nations.
Another significant period for Greek–Bulgarian relations, aside from the
Byzantine years, included the seventeenth to eighteenth centuries, when the
Greeks, Jews, and Armenians dominated trade, and “the Bulgarian traders
were active . . . even if many of them were described as or even called them-
selves ‘Greek’” (Crampton 1997: 38). The strong influence of Greeks upon
the Bulgarians is depicted vividly in a book by Paisii, a monk in the monas-
tery of Hilendar on Mount Athos, written in 1762, A Slavonic-Bulgarian His-
tory of the Peoples, Tsars, Saints, and of All Their Deeds and of the Bulgarian
Way of Life. In this book, Paisii warned Bulgarians about the dangers of losing
their national identity through “hellenization.”
The Bulgarians respected Greeks so much that “many Bulgarians who re-
garded themselves as cultured or educated preferred to speak Greek, believing
this to be the mark of the enlightened person; and given the philhellenic hyste-
ria in western Europe and the United States this was hardly surprising. But
Greek also had its advantages in the Balkans as a widespread medium of com-
merce, and many guilds and trading concerns continued to use it and even
keep their records in it, into the second half of the 19th century” (Crampton
1997: 67). The main area of friction between Greeks and Bulgarians was the
church, because the Greeks dominated it.
However, the rise of the communist regime and the cold war between East-
ern Europe and the Western countries more or less deactivated the relations
between the two countries. Nevertheless, after the fall of communism, the
relationship recovered significantly, and the two countries are currently on
very good terms with each other. Countries such as the Czech Republic, Hun-
gary, and Poland have become the neighbors of Europe’s strongest economy,
Germany, since the fall of the Iron Curtain, while Bulgaria is the neighbor of
one of the European Union’s poorest members—Greece. Still, Greece is the
closest European Union (EU) member to Bulgaria. In fact, it is the only EU
member in the Balkan region and one of the richer Balkan countries, and be-
cause Greece supports the EU membership of Bulgaria, Greek entrepreneurs
and their products are very welcome in the country, while at the same time,
there is a significant absence of Western products, even German products.

Thus, friendly historical relations, the absence of Western investment interest,
and geographical proximity are expected to be important incentives for the
significant participation of Greek MNEs in volume and number of FDI projects
(Bitzenis 2002a).
Although Greek and Bulgarian relations have been favorable over most of
the centuries, we cannot say the same for Turkish and Bulgarian relations.
Because political conflicts have occurred between the two countries, one would
expect unfavorable conditions for great accumulation of Turkish FDI inflows
in Bulgaria. On the other hand, geographical proximity and the existence of
Turkish minorities could be expected to be favorable reasons for the attraction
of Turkish entrepreneurs in Bulgaria.
The conflicts began in 1393, when Bulgaria was occupied by the Ottoman
Empire; Bulgaria remained under its rule for approximately 500 years. Be-
cause Bulgaria was the center of the European section of the Ottoman Empire
and also the country that had the greater, or significant, population of Otto-
man–Muslim elements, the pressures for conversion to Islam were stronger
among the Bulgarians compared to other Balkan Christian countries.1 After
the liberation of the Bulgarian state, many Muslims left, because it was diffi-
cult to live in a Christian community that had been enslaved for 500 years by
Muslims. Besides the obvious hostility that developed over the 500 years of
Turkish occupation and the “bad blood” remaining from the Balkan wars,
there was another, more recent point of friction between the two countries: the
Pomaks and the Muslims of Bulgaria. The fact that the Bulgarians with Turk-
ish roots were not wanted in Bulgaria was plainly demonstrated by Prime
Minister Chervenkov, when in 1952, he encouraged the emigration of 250,000
Turks. This happened at a time when Bulgaria was one of the most restrictive
Eastern societies, and shortly before the 1953 government decision stating
that anyone who left the country illegally could be sentenced to the death
penalty and their families taken to concentration camps. During that particular
incident, Turkey2 agreed to take only 162,000 people before it closed its bor-
ders (Neuburger 1997; Snavely and Chakarova 1997; Crampton 1997: 195).
The pressures on the Turkish population intensified after the 1971 program
for the creation of a unified socialist nation. In the early 1970s, Pomaks
were required to adopt Slav names or be punished. By 1974–75, Turkish
schools and Turkish-language newspapers and journals were shut down
(Neuburger 1997: 6). Another 130,000 Turks left Bulgaria between 1968
and 1978 (Crampton 1997: 203).
In the mid-1980s, Todor Zhivkov stated that “There are no Turks in Bul-
garia,” supporting the idea of a unified socialist nation. In 1984–85, there was
another attempt to assimilate the 800,000 Bulgarian ethnic Turks by obliging

them to take Bulgarian or Slav names. However, the government’s attitude
was not against Turks. Zhivkov based the government’s persistence on the fact
that “most of the ethnic Turks were really Bulgarians who had been forcibly
converted to Islam and a Turkish identity during the Ottoman period” (Bell
1997: 359). He was, in fact, referring to Pomaks who had been Islamicized
and Turkified under Ottoman rule. Furthermore, in August 1989, a hunger
strike by the Turkish minority forced Zhivkov to announce that ethnic Turks
once again were free to leave Bulgaria if “they preferred capitalist Turkey to
socialist Bulgaria.” After that, 344,0003 ethnic Turks left Bulgaria, until Turk-
ish authorities closed their borders, because this massive emigration created
problems for Turkey. This event led to the international isolation of Zhivkov
and gave the opportunity to Petar Mladenov, the minister of foreign affairs and
the leader of a cabal, to act against Zhivkov and become, with the acceptance
of Russia, the new prime minister after Zhivkov’s resignation November 10,
1989. Within four months, about 42 percent of the people who had emigrated
had returned to Bulgaria (Neuburger 1997: 7).
Another country that has a significant historical relationship with Bulgaria
is Germany. The relationship goes back as far as the Balkan wars, which were,
in every respect, disastrous for Bulgaria. The Radoslavov government was in
desperate need of money to pay for the consequences of the wars. This need
was met by an association of German banks, that granted the Bulgarian gov-
ernment a loan of 500 million gold leva, in July 1914.
Furthermore, World Wars I and II found Bulgaria on the German side ex-
pecting territorial gains, but Bulgaria lost in both wars. Finally, it was during the
twentieth century and the fifty years of communism that Bulgaria had signifi-
cant positive trade relations with East Germany, both being members of the
CMEA. Moreover, in addition to the favorable past historical bilateral relations
of Germany and Bulgaria, it is well known that Germany has a powerful economy
with strong multinational enterprises willing to invest in emerging markets.
Nevertheless, it is an unexpected result that Germany occupies only the
second position in foreign invested volume of capital inflows to Bulgaria, with
only US$670 million (Table 1), being in eleventh place in number of FDI
projects (Table 2). It should also be noted that Germany is in first place as a
foreign investor country in volume in many Central and East European coun-
tries. As mentioned, during the Bulgarian transition to a market economy,
German inflows of capital totaled less than US$700 million. This may not be
considered significant if we take into account the total volume of German FDI
outflows per year (US$100–200 billion per year) when something more than
half a billion U.S. dollars has been invested in Bulgaria in more than a decade.
10
Table 1
Foreign Direct Investment by Countries and by Years (in million USD)
Rank 2003 Total by

No. Country 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Q1 country
1 Greece 0.2 5.1 3.0 29.5 14.6 16.1 3.3 14.9 241.1 240.2 225.6 206.2 1,000.0
EASTERN EUROPEAN ECONOMICS
2 Germany 0.1 58.6 111.0 16.2 53.1 31.4 55.7 101.0 72.3 67.4 73.8 38.0 676.6
3 Italy 0.0 0.2 5.2 2.3 1.2 0.4 2.1 23.0 339.7 146.5 23.1 63.4 607.0
10 Cyprus 0.3 1.2 0.4 1.4 7.5 20.6 109.0 109.0 –11.3 17.8 24.7 36.01 316.7
12 Russia 0.3 1.4 2.3 15.1 14.4 2.0 14.8 104.0 50.6 –4.4 4.4 3.8 208.9
14 Turkey 0.0 9.8 1.3 13.7 7.3 9.9 23.8 39.4 19.5 –9.7 13.8 6.1 134.8
Total 34.4 102.4 210.9 162.6 256.4 636.2 620.0 818.8 1,001.5 812.9 873.7 1,272.6 6,802.4
Source: Bulgarian Foreign Investment Agency 2004.

Table 2
Distribution of Foreign Investors in Bulgaria by Regions (number of foreign

direct investment projects)
Country of investor
Turkey Russia Greece Germany Cyprus
Blagoevgrad 20 62 745 29 6
Bourgas 400 350 60 89 33
Varna 205 743 52 146 32
Veliko tirnovo 128 47 22 24 6
Vratsa 14 26 4 11 1
Gabrovo 61 67 38 30 1
Dobrich 115 216 27 62 4
Kurdjali 391 15 7 5 2
Kyustendil 12 18 74 5 —
Lovech 55 57 18 29 6
Pazardjik 110 76 51 23 5
Pleven 18 57 3 13 9
Plovdiv 1,153 302 547 115 30
Rezgrad 323 30 1 6 —
Rousse 190 134 13 45 6
Silistra 231 46 6 5 —
Sliven 149 57 62 5 5
Smolyan 181 55 110 16 11
Sofia city 1,203 1,225 1,575 757 287
Stara zagoraa 152 88 43 31 5
Tirgovishte 120 29 4 7 —
Haskovo 586 59 96 15 —
Shoumen 488 57 5 25 4
Yambol 36 44 27 7 3
Total by countries 6,366 4,004 3,746 1,554 475
Source: Bulgarian Foreign Investment Agency 2003.
As mentioned above, the end of World War II in 1944 found Bulgaria in a

difficult economic situation due to years of being on the wrong side during the
wars. Close to the end of World War II, Bulgaria found itself in an awkward
political position. At the beginning of the war, Bulgaria had sided with Ger-
many, but at the end of the war, when the defeat of the Germans was close and
the monstrosities of the Nazis started to appear, Bulgaria wanted to join the
forces on the opposing side. This attempt seemed really dangerous because
the German troops were on Bulgarian territory. In the end, the Soviet Union
cut the Gordian knot and declared war on Bulgaria on September 8, 1944. Not
surprisingly, the Soviet troops were rather welcomed by the Bulgarian people.
Communism had been flourishing in Bulgaria since 1943. In September
1946, Bulgaria was declared a Republic by referendum, which ended the
dynasty that had twice taken the country to war alongside Germany. The trans-
formation of the political system was completed in December 1947 with the
Dimitrov Constitution declaring Bulgaria a People’s Republic. The one-party
system was imposed at the end of 1947.
Until 1990, when free elections were held and the Communist Party lost its
constitutional guarantee to exclusive power, the party controlled the govern-
ment and all aspects of national life. It created a socialist economy and a
social structure based on the Soviet model. In fact, every “aspect of national
life seemed to be refashioned on the Soviet model: education, culture, economy,
architecture, and military. To keep the Bulgarians on the correct line there
were ever more Soviet advisers attached to every arm of government”
(Crampton 1997: 194).
During the whole communist period, Bulgaria was under the influence of the
Soviet Union. Even after Stalin’s death, Bulgaria followed the revised Soviet
attitude adopted by Stalin’s successors in the Kremlin. In March 1954, Todor
Zhivkov became the new Bulgarian Communist Party leader and prime minis-
ter. He was the longest-serving communist leader in Eastern Europe. Zhivkov
“always stressed fidelity to the Soviet Union, going as far as to ask the USSR to
admit Bulgaria as the sixteenth Soviet Republic” (Bell 1997: 357).
However, the external shocks, such as the political fragmentation of the
former Soviet Union, that the Bulgarian economy suffered and the strong
dependence of Bulgarians upon the Russians had negative consequences for
Bulgarian industrial output, trade balance, and GDP. Nevertheless, it is also an
expected result that strong historical links, geographic proximity, cultural close-
ness, and common religion beliefs will positively influence the investment
decisions of Russian entrepreneurs. Furthermore, more than 4,000 Russian
companies have been registered in Bulgaria (Table 2), and Russian FDI inflows
are about US$300 million (Table 1) if we include the offshore companies with
clear Russian investment interest. We estimated these investments via offshore
centers at US$350 million. More than half of such inflows from tax havens
such as Cyprus or Luxembourg reflect investments by Greek MNEs. The rest
of this kind of FDI inflow in Bulgaria belong mainly to Russians and Turkish
entrepreneurs. Thus, it is not surprising that the tax havens of Cyprus and
Luxembourg are at the top of the table of FDI inflows in Bulgaria.
Are Political Instability and Government Inability/

Unwillingness or Adverse Political Conditions Responsible
for Unsuccessful Transition Reforms?
The Bulgarian communist regime did not collapse in a climate of violence and
revolution, as happened in former Yugoslavia and Romania. It was a so-called
disguised transition to democracy brought from within the communist party
as a response to public feeling and the obvious fact that the virtues of commu-
nism were fading. Petar Mladenov, then the minister of foreign affairs, and
Dobri Dzhurov, minister of defense, forced the resignation of Zhivkov. It was
November 10, 1989, one day after East Germany opened the Berlin Wall, that
the Bulgarian Communist Party (BCP) accepted Zhivkov’s resignation. After
the fall of the communist regime, Bulgaria faced great political instability,
changing eight prime ministers in seven years (Table 3).
Nevertheless, the changes in governments alone did not lead to the delay in
stabilization, liberalization, and structural reform, and consequently, to the
delay in a smooth transition to a market economy. Bulgaria lagged behind
most of the rest of Central and Eastern Europe in economic reform for other
reasons, such as the adverse initial conditions and the inability or unwillingness
of politicians to introduce adequate reforms, which are analyzed elsewhere in
this article. Furthermore, Bulgaria’s grave economic dependence upon the
Soviet Union, the collapse of the CMEA, which caused more damage to Bul-
garia in comparison to other transition economies, the unification of Germany,
and many other reasons, led Bulgaria to face more obstacles in its economic
development.
After the resignation of the president and chairman of the communist party,
Zhivkov, on November 10, 1989, the government passed to Petar Mladenov,
the former vice president of the communist party. It was at the end of 1990,
after several structural and personnel changes, that the communist party started
to separate from the state. More specifically, in January 1990, the parliament
abolished Article 1 of the constitution, which had ensured the power monopoly
of the communist party, and Bulgaria officially became a democratic state. On
December 7, 1989, after the formation of the Union of Democratic Forces
(UDF), a party consisting of sixteen prodemocracy opposition parties and or-
ganizations, Bulgaria took a big step toward democracy. On February 8, 1990,
Andrei Lukanov became the acting prime minister, and Petar Mladenov be-
came the president of Bulgaria. After long discussions between the commu-
nists and the opposition, all the parties agreed on and accepted free elections.
Petar Mladenov called for early elections on June 10 and 17, 1990 (Bell 1997:
369).4 They were the first free multiparty elections (Dimitrova 1998: 175) for
a Grand National Assembly, which were held during June 1990, and Bulgaria
14
Table 3
Bulgarian Governments, 1990–2002
Bulgarian Prime Ministers Bulgarian Presidents
1. Andrei Loukanov February 8, 1990–December 19, 1990 Bulgarian Communist Party (BCP) 1. Mladenov (BCP)
November 1989–
July 7, 1990
2. Dimitur Popov December 20, 1990–November 7, 1991 Independent, coalition government
3. Filip Dimitrov November 8, 1991–December 29, 1992 Union of Democratic Forces (UDF) 2. Zhelev (UDF)
August 1990–May 1996
4. Lyuben Berov December 30, 1992–October 17, 1994 Bulgarian Socialist Party
5. Renata Indzhova October 18, 1994–January 24, 1995 Caretaker government

6. Zhan Videnov January 25, 1995–February 11, 1997 Bulgarian Socialist Party (BSP) 3. Stoyanov (agreed to as
president by all parties)
January 6, 1996–present
7. Stefan Sofianski February 12, 1997–May 20, 1997 Caretaker government
8. Ivan Kostov May 21, 1997–June 2001 Union of Democratic Forces
9. Simeon Saxe- Prime minister June 17, 2001–present
Coburg-Gotha National Movement (Exiled King Simeon II) 4. Georgi Parvanov (BSP)
Simeon II—42.73 percent 53.3 percent, November
2001 (forty-four-year-old
academic, who has a
reputation as
a conciliator
and modernizer)
Source: Author’s research, various sources.

became the first East European country to freely elect a parliament dominated
by former communists (Jackson 1991). These elections were free, but nobody
knows whether they were fair (Berov 1993; Crampton 1997; Bell 1997).5
Over time, the successive Bulgarian governments reacted negatively to, or
were negatively affected by, several external shocks or unexpected events that
resulted in a significant delay in all the transition reforms. For example,
Mladenov realized that the foreign debt was $12 billion instead of $3 billion
and that the country’s economy was in a far more difficult situation than had
formerly been presented. He planned to correct the economic situation by
restructuring and privatizing public enterprises and banks and decentralizing
and demonopolizing the market. Furthermore, he hoped to erase “racial ha-
tred” by inviting ethnic Turks, who had been driven away by Zhivkov, to re-
turn to Bulgaria and reclaim their abandoned property.
The collapse of Yugoslavia6 was another important obstacle that the gov-
ernment had to face. According to United Nations statistics, the embargo on
Yugoslavia from 1992 to 1994 cost Bulgaria $8 billion and created real prob-
lems for the country’s trade, because former Yugoslavia’s roads were the cheap-
est, closest, and perhaps the only way to reach the West to export its products.
The rail and road routes through the former Yugoslavia were some of the lead-
ing arteries for Bulgarian trade, and the alternatives through Romania and the
Black Sea were slow and overcrowded. Sanctions against both Iraq and Yugo-
slavia were calculated at a cost of $10.5 billion to Bulgaria, which is equiva-
lent to the total foreign debt of Bulgaria (Crampton 1997: 231).
Furthermore, in Frankfurt, in March 1994, the Bulgarian government came
to an agreement with the London Club of Bankers on the reduction of Bulgaria’s
foreign debt by 50 percent, and loan payments began. The initial offer was a
reduction of 38 percent, but the Bulgarian side achieved the 50 percent it needed.
At about that time, two months before the introduction of the value-added tax
(VAT) in April, a major economic crisis occurred. There was a considerable
disruption in the domestic foreign exchange market as well as a significant
depreciation of the national currency. This destroyed the credibility of the
currency and caused an expectation of inflationary increases in fixed prices
for electricity and coal, increased target prices on internal and external postal
services and tobacco products, and also on a more extensive list of goods
monitored by the government. In light of the economic situation, the VAT
became an additional proinflationary factor, resulting in even more dramatic
price increases. The inflation rate was nearly twice that in 1993. The country
was unable to react because of the delay in the reforms, especially the slow
pace of privatization and the termination of loss-making enterprises.
On September 2, 1994, Berov offered his resignation. A caretaker adminis-
tration was appointed under Renata Indzhova, a former head of the state’s
privatization agency, who became Bulgaria’s first female prime minister. The
elections were scheduled for December 18, 1994. There was a change in the
composition of the UDF before the elections. Stefan Savov took his Demo-
cratic Party out of the front and formed a coalition with the Popular Union and
the Bulgarian Agrarian National Union (BANU, from 1899). The elections
showed7 a clear shift of voters toward the BSP (Bell 1997: 389), following the
typical pattern of Central and East European countries (CEECs) such as Po-
land, Hungary, Lithuania, and Slovakia, which tend to return “reformed (vel-
vet) communists” to power (Waters 1998: 222).
After the December 1994 elections, Zhan Videnov became prime minister.
It was the first time in the post-communist period that a party gained a solid
parliamentary majority. The five years, 1990 through 1994, of economic
reform were a disaster, featuring nonexistent progress and an increased crime
rate. The Bulgarian population voted against the UDF feeling that, because
the previous five years had been dominated by the UDF, it was responsible for
the failure of the reform. However, this was not correct, because the UDF had
been in office for only one year and had helped the Bulgarian economy to
show signs of recovery and produced a more stable economic environment.
Videnov tried to proceed to rapid privatization based on the Czech coupon
model, that is, mass voucher privatization, and tried to restore trade relations
with the former Soviet Union.
From the beginning of 1996, the Bulgarian lev began to lose its value, the
banking system collapsed (Bitzenis 2002b, 2004), inflation was growing rap-
idly, and the government could not meet its foreign debt payments without loans
from the International Monetary Fund (IMF). Videnov negotiated with the IMF
for the introduction of a currency board in order to prevent hyperinflation.
On June 1, 1996, the second direct elections for the head of state were held
in Bulgaria. Prior to those elections, the main opposition parties agreed to
nominate a single candidate. They agreed on a pro-reform lawyer, Peter
Stoyanov, who finally won the election. President Zhelev stated officially from
the beginning that he would not run for reelection.8
In December 1996, Bulgaria’s socialist leaders publicly apologized to the
people of Bulgaria for two years of misrule and promised to bring to justice
those found guilty of corruption. The apology followed the resignation of the
socialist prime minister, Zhan Videnov, on December 21, 1996, which the Na-
tional Assembly accepted on December 28, 1996, after months of criticism.
The financial crises of 1996 and 1997 severely affected the Bulgarian
economy. The gross domestic product (GDP) dropped in 1996 and 1997, after
two years of growth. The main reasons leading to decline were blockages of
structural reform, slowness of the privatization process, and a loss in the inter-
national market position of Bulgarian companies following the disintegration

of the CMEA. The crisis made the government realize that decisive measures
were necessary in order to improve the overall environment for domestic and
foreign businesses, by dealing with loss-making banks and enterprises, and
accelerating privatization.
A general strike was called on January 28, 1997, with demands for early
elections, weekly wage payments, and pay increases. Peter Stoyanov’s deci-
sive mediation led to an agreement among the political forces in Bulgaria to
hold early general elections in April in order to call off protests and strikes.9
On February 4, Nikolai Dobrev, the interior minister, was designated by Prime
Minister Stoyanov to form a new government against a backdrop of very
high inflation, disruption in bread and food supplies, civil unrest, and fuel and
medicine shortages. On February 12, 1997, the thirty-seventh National As-
sembly was dissolved, and on February 19, President Stoyanov scheduled early
elections for April 19. On the same day, he appointed Sofia mayor, Stefan
Sofiyanski, as prime minister, and a caretaker cabinet was sworn in. The new
Sofiyanski cabinet named its major priorities to be negotiations with interna-
tional financial institutions, and it took steps to ensure fuel and grain supplies.
On February 20, the parliament approved, by 192 votes out of the total 240
seats, the appointment of wider powers to the caretaker government, allowing
it to negotiate and sign agreements on loans. The main task of a caretaker
government is the preparation of early elections. In this case, there was an
urgent need to begin to tackle the deep economic crisis in the country. It was
vital to allow this cabinet to negotiate and sign loans with the IMF and other
international financial institutions.
After the collapse of the communist regime, and several governments later,
while a certain degree of macroeconomic stability and growth appeared in
much of Central and Eastern Europe, Bulgaria had three major economic cri-
ses, two of them in less than one year, April/May 1996 and January/February
1997. These crises included a virtual collapse of the banking system, a signifi-
cant decline in GDP, a devaluation of the lev, double-digit monthly inflation,
an escalating budgetary crisis, and a general loss of confidence and credibility
in the economic policy.
Recovery started on April 19, 1997, when the UDF and its leader, Ivan
Kostov, garnered 52.26 percent of the vote, thus winning an absolute majority
with 2.5 times more seats than the Socialist Party.10 That change in govern-
ment and the successful implementation of a currency board, which drasti-
cally reduced the rate of inflation, gave Bulgarians hope for economic recovery
(Bulgarian Economic Monitor, 1998: 1–2). Surprisingly, and for the very first
time in the post-communist period, the opposing political party, the Socialists,
stated that it would not organize protests against the government’s program
and allow it to carry out reforms without opposition.
Foreign investors have complained often in the past about instability and
unpredictability in the country. However, macroeconomic and political insta-
bility decreased significantly in the first five years following the introduction
of the currency board, and the parliament remained unchanged for four years.
In 1997, Bulgaria chose the DM as its reserve currency (OECD 1999: 97–100)
because of its medium-term strategic goal of joining the EU. The govern-
ment announced the indefinite maintenance of the currency board and the
existing exchange rate, which was converted to the euro at the same rate,
1,000 lev/1 deutsche mark, beginning January 1, 1999. Moreover, Bulgaria
slashed three zeroes from the lev notes and price tags as of July 5, 1999,
putting the lev at par against the deutsche mark, the anchor currency under the
IMF-backed fixed exchange rate system introduced on July 1, 1997. As of
January 1, 2002, there has been a fixed exchange rate between the Bulgarian
lev and the euro, 1.95583 lev per euro.
Although during the first years after the introduction of the currency board
the Bulgarian people agreed that the Bulgarian economy was stabilized, under
the latest, newly elected National Assembly,11 there are many criticisms, espe-
cially since the economic disaster of Argentina, that the positive effect of the
currency board has gradually disappeared, and negative consequences have
come into effect. They also believe that if the fixed exchange rate of the Bul-
garian currency lasts another six years and the government has no right to
make monetary policy, people will go out into the streets. They also argue that
if the currency board is abolished, a semifixed exchange rate of the Bulgarian
currency must be introduced, resulting in improved economic indicators.
Thus, we can conclude that government instability and especially political
instability causing institutional or structural instability limited FDI inflows in
the transition period.
Literature Review of Other Questionnaire Surveys
This section contains a short literature review in order to present question-

naire surveys already existing in our field concerning findings about politi-
cal stability and instability, cultural considerations, geographic proximity
and closeness, and historical links, which will be compared with our results
in the following section.
Benacek and colleagues concluded that:
the findings of econometric studies tend to support survey results. This sug-
gests that market size and growth potential have been the driving force be-
hind FDI, with factor cost advantages playing a lesser but still significant
role. Macroeconomic and political stability are also taken into account. . . .
For example, political stability may influence the distribution of investment
across countries, while specific incentives may direct investment towards
certain sectors . . . Taken individually, a single survey may suggest mislead-
ing conclusions. For example, a study that excludes Hungary and the Czech
Republic may conclude that political and economic stability is not very im-
portant to investors. But a study that does include them will indicate that
their relative stability can help explain why such a large share of investment
in the transition economies has gone to these two countries. (Benacek et al.
2000: 193–202)
Meyer (1996) found that market-oriented investors in Hungary regard po-

litical and economic stability as an important factor in location decisions. Fac-
tor-price-oriented investors are less concerned with stability. He concluded
that market-oriented investors in Hungary are influenced by the lack of com-
petitors in a given market.
Arthur Andersen (1994), in an Organization for Economic Cooperation and
Development (OECD) survey, found that the main barriers or constraints re-
garding FDI were the following: bureaucratic or administrative issues, legisla-
tive issues, economic climate, business infrastructure, political volatility, and
cultural considerations. Moreover, the study mentioned that Austrian firms
gave priority to both geographic proximity and strong historical links with
Hungary and Czechoslovakia and, to a lesser extent, with Poland when decid-
ing to invest.
Lankes and Venables (1997) found that market size is the most important
determinant for market-oriented investors, except in Hungary and the Czech
Republic, where political and economic stability dominated. Geographical
closeness to the EU was considered important, especially to market-oriented
investors. However, survey respondents indicated that investment was not
primarily motivated toward gaining access to EU markets, suggesting that
proximity was important mainly to enable intrafirm trade.
Lankes and Venables (1997) also concluded that the first investor motiva-
tion was political stability in the case of the Czech Republic and Hungary and
the second investor motivation in the case of Poland. Moreover, the fourth in-
vestor motivation for Poland was geographical closeness together with ac-
cess to other markets, and only geographical closeness for the Czech Republic
and Hungary.
The survey by Iammarino and Pitelis (2000) focused on Greek outward
FDI in Bulgaria and Romania. They reported the type of FDI by motivations
perceived as most important in determining the choice to invest. Out of 85
respondents, 53 mentioned economic growth, 31 geographical location, 31
investment incentives, and 31 labor costs as the major FDI incentives, while
14 mentioned cultural similarities, 8 political and economic climate, and 7
historical links, suggesting that these factors were of limited importance. The
top-ranking constraints and risks faced by investors in undertaking production
activities were bureaucracy and administrative constraints, mentioned by 63;
business infrastructure, 45; and legislative, 40, and economic climate con-
straints, 39. However, constraints related to political uncertainty were men-
tioned by 27 and cultural considerations by 23, and thus seem not to be so
influential. Unsurprisingly, both geographical location and proximity to the
EU market were, in relative terms, more significant for exporters than for local
suppliers, while for the latter relatively higher scores are attached to factors
strictly linked to the local social environment, such as cultural similarities and
historical links.
A survey conducted by the Southeast European Cooperative Initiative (SECI)
in 1998 found that Greek companies show a preference for Bulgaria, Roma-
nia, and the Former Yugoslav Republic of Macedonia (FYROM) because of
their geographical and cultural closeness together with common religious be-
liefs, existing trade relations, and lack of other significant Western investment
interest. At the same time, they consider these three countries and the Balkans
in general as initial investment openings with a view to later expansion via
these nations into Russia and the Black Sea states. Moreover, the most signifi-
cant disincentive to development in all the countries under examination was
found to be political and economic instability.
Furthermore, in April 1998, the consulting company KPMG International
initiated a survey of foreign investors in Bulgaria in order to identify key
factors, such as major incentives and barriers to foreign investment, present
business opportunities, and further investment considerations. The skilled
labor force has been one of the driving considerations for more than a third,
36 percent,12 following by low labor cost at 34 percent, former business con-
tacts at 34 percent, strategic geographic location at 31 percent, good local
market at 29 percent, proximity to home operations at 9 percent, and tax
incentives only at 2 percent.
In another questionnaire survey, Pye (1998) considered a sample survey of
investments by major European and North American countries in the Czech
Republic, Hungary, Poland, Romania, and Slovakia between 1989 and 1996,
involving 334 firms. In the Czech Republic and Slovakia, labor cost advan-
tages were considered the main factors, along with overall stability, profitabil-
ity, and local market access. Pye (1998) confirmed earlier findings that
export-oriented firms are in the minority of firms surveyed. Those that existed
were geared toward supplying neighboring CEECs. Pye (1998) also found
that overall stability of the host country for investment is considered some-
what important, especially in the Czech Republic.
Finally, in a survey of 150 Austrian firms investing in CEECs, Altzinger
(1999) found that market potential is the most decisive factor for investors. He
also concluded that proximity to Austria is important to Austrian investors,
especially in the finance and insurance sector. He suggests that this is partly
due to historical and cultural ties.
Questionnaire Survey Outcomes
For the purpose of examining whether political instability, cultural distance,

geographical proximity, and historical links, among other reasons, played a
significant role in investing in Bulgaria or not, a questionnaire survey13 was
designed and conducted by this author in order to obtain information re-
garding the determination of FDI in Bulgaria during the post-communist
period 1989–99.14
According to the existing literature, there has been no other statistically
analyzed research specific to Bulgaria of this magnitude—sixty-four compa-
nies were interviewed using a questionnaire—and at the same time statisti-
cally significant sample, for identifying for the incentives and barriers to the
FDI decisions in Bulgaria. As mentioned in the preceding section, other sur-
veys tried to determine incentives and barriers for more than one country
simultaneously and had fewer than sixty-four MNEs for each country in the
sample.
The sample is very representative, consisting of companies that invested a
significant amount of more than US$1 million each. Moreover, the sample is
also representative because the respondents15 cover the sectors of industry, ser-
vices, and trade.16
From the questionnaire survey, Figure 1 shows that the main incentives
were market size 94 percent, low labor cost of unskilled workers 67 percent,
geographical proximity 58 percent, international pressures from competition
45 percent, prospects for market growth 44 percent, link to other neighboring
countries 42 percent, and lack of local competition 40 percent.
According to the survey, the most important barriers that the investors had
to deal with in the Bulgarian market (Figure 2) were unstable legal system 74
percent; bureaucracy 58 percent; corruption, crime, and mafia 53 percent; and
high investment risk 52 percent.
We can conclude that political instability was an unimportant barrier with a
percentage of only 6.25 percent. Political instability was of minor importance,
because this survey was conducted from the end of 1998 to mid-1999, a pe-
22
Figure 1. Most Important Incentives for Foreign Direct Investment in Bulgaria (research based on sixty-four
multinational enterprises)
market size 93.8%

low unskilled labor cost 67.2%
geographical proximity 57.8%
international/globalization pressures 45.3%
market growth 43.8%
link to other (neighbor) countries 42.2%
lack of local competition 40.6%
acquisition of assets 37.5%

avoidance of trade barriers 31.3%
unsatisfied local demand for products 28.1%
low skilled labor cost 28.1%
cultural closeness 23.4%
following the client's theory 23.4%
exploiting existing buiness links 21.9%
establishing an export base 18.8%
lack of infrastructure 17.2%
cultural distance (as an incentive) 17.2%
following the competition (theory) 12.5%
Figure 2. Most Important Barriers, Obstacles, or Disincentives for Bulgarian

Foreign Direct Investment Inflows (based on research from sixty-four
multinational enterprises)
unstable legal system

73.44%
bureaucracy 57.81%
corruption, crime, mafia 53.13%
high investment risk 51.56%
limited purchasing power, low GDP per capita 50.00%

lack of infrastructure 42.19%
macroeconomic instability 31.25%
high value-added tax, high taxation 29.69%

behavior against consumption and labor 26.56%
lack of managerial skills 20.31%
low progress in transition 15.63%

political instability 6.25%
riod of political stability (Table 3). The survey supports the argument that
geographical proximity ranked highly, at 57.8 percent, or in third place in
Figure 1. This was due to the presence of 37 investors who were Greek entre-
preneurs or MNEs with significant and clear Greek interest. From a statistical
point of view, cultural closeness was an important incentive for most Greek
MNEs participating in the questionnaire survey (see statistical analysis sec-
tion). Cultural closeness was a concern for all MNEs, because some of them
believed that they had a culture and mentality different from the Bulgarian
ones. Others believed that Greek mentality and Greek culture are not similar
to Bulgarian mentality and culture, but at least the Greek mentality is closer to
that of Bulgarian or even the Balkan. Finally, historical links as an incentive
have been considered by only one Greek MNE and by no Western MNEs. Our
short historical survey, presented in the first part of this article, demonstrated
that German, Greek, Russian, and Turkish relations have been strong through-
out the centuries. However, this conclusion is not consistent with our survey
results. Often, geographical distance is followed by cultural differences, and
in the Central and East European countries, in particular, there is a trend to-
ward imitating Western civilization. Actually, Bulgaria belonged to Western
civilization before World War II, but its fifty years in the eastern bloc and on
the side of the former Soviet Union were enough to change the whole Bulgar-
ian political, economic, and social environment and thus the mentality of its
citizens.
Overall, interest in investments on the part of Western developed countries

in the whole Central and East European (CEE) region is limited (Table 4).
Thus, US$174 billion have been invested in the CEE region in more than a
decade from all over the world, and only US$23 billion have been invested in
the entire Balkan region, that is, only 2–5 percent of the total amount of FDI
inflows are to the CEE region, based on worldwide statistics.
However, geographical proximity has proved to be very important when
considering FDI in Bulgaria. Geographical proximity is a major incentive
that has helped Greek MNEs to become dominant in the Balkan region, and
specifically, in Bulgaria (Tables 1 and 2). There is a regionalization that
helps small firms to become MNEs and to dominate in neighboring coun-
tries (Bitzenis 2004):
Regionalisation and increased regional integration helped not only the Greek
MNEs to become dominant entrepreneurs in the Balkan region, but also the
Austrians in Slovenia and Croatia, the Nordic countries (Sweden, Norway
and Finland) in the Baltic region (Estonia, Lithuania and Latvia), Germany,
France, the UK in the ex-Visegrad countries (Poland, Hungary, Czech Re-
public and Slovakia) and the UK, France, Germany and Netherlands in ad-
vanced economies such as the Belgian one. (Bitzenis 2004: 415–16)
Statistical Analysis of Questionnaire Findings
Based on Table 5, we can conclude that sixty out of sixty-four companies felt
that there was political stability in Bulgaria during the time of this survey,
1998–99, after the IMF intervention and the introduction of the currency board
in mid-1997. The government elected in May 1997 remained in power for
four years, making it the only political party to stay in power for such a long
period in the transition years.
Historical ties, common religion, and cultural closeness were considered
positively by fifteen of the thirty-seven Greek MNEs. While there is a cultural
distance between the West European countries and Bulgaria, according to a
recent economic theory (Morosini, Scott, and Harbir 1998), such distance
encourages investments, contradicting the commonly held view that cultural
closeness encourages investments. Thus, there is a tendency among modern
Bulgarians, just as among most other East European citizens, to mimic West-
ern consumer activities, thus making cultural distance into cultural closeness.
As Greece has been a member of the EU since 1979, in the eyes of the Bulgarian
public, Greek goods and services are West European and therefore of higher
quality. The fact that Bulgarian people often travel to Greece also affects their
attitudes, as they become more familiar with Greek brands (see Tables 6 and 7).
Table 7 shows that ten out of twenty-seven (37 percent) foreign MNEs
(other than Greek) mentioned cultural distance as an incentive for them to
invest in Bulgaria.
Tables 8 and 9 show that the origin of MNEs is not very significant when
considering cultural distance and cultural closeness, while the sector that each
MNE belongs to is a critical factor. For example, in the trade/food sector,
cultural closeness is a decisive incentive because of similar mentality and pref-
erences in the Southeast European region with respect to everyday meals, which
results in common tastes. Although in the fast-food sector, for example, the
U.S. McDonald’s or the Greek Goody’s, there is a cultural distance between
Bulgaria and the Western countries, because Bulgarians tend to mimic a West-
ern lifestyle, this cultural distance develops into cultural closeness and there-
fore becomes an incentive.
We are living in an increasingly global environment. All the countries that
are moving into a market economy, liberalizing their economies, and opening
their borders are globalizing in order to become one entity with the rest of the
world and thus succeed in integration. Bulgaria and its citizens are adopting
and using Western civilization and Western products in everyday life, because
this is part of the procedure of globalization and integration.
Tables 6, 7, 8, and 9 show that the issue of cultural distance/closeness is
still debatable, and it is based not on the origin of MNEs but on the specific
industry in which each MNE is involved.
Table 10 shows our findings regarding historical links, which were unex-
pected. According to the table, only one MNE, a Greek one, mentioned his-
torical links as an important incentive for undertaking an FDI project in
Bulgaria. According to our empirical evidence, historical links play no role,
and thus, neither Greek MNEs nor German, Turkish, or Russian MNEs en-
tered Bulgaria to exploit favorable past country relations. However, the inter-
views revealed that most of them, especially Turkish entrepreneurs, entered
Bulgaria in order to serve the local market and its minorities. In recent years,
the countries of the former eastern bloc have been trying to participate in the
globalized system, thus opening their borders, liberalizing their economies,
and becoming members of the integrated world. On the other hand, MNEs
understand that globalization has created strong competitive pressures, and,
in this new business environment, expansion to other countries that lack local
competition and Western investment interest is necessary. In reality, in order
for MNEs to fulfill such a goal, and keeping in mind only their expansion,
increased market share, and increased profits, they should not consider prior
negative historical relationships between their home country and the host coun-
try. This may explain the massive entrance of Greek MNEs to FYROM, de-
26
Table 4
Foreign Direct Investment Inflows in the Central and East European Countries and the Balkan Region (1990–2001)
19590 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total
Eastern Europe
Albania — — 20 58 53 70 90 48 45 41 143 180 748
Bulgaria 4 56 42 40 105 90 109 505 537 819 1002 651 3,960

Romania — 40 77 94 341 419 263 1,215 2,031 1,041 1,040 1 137 7,698
Yugoslavia — — — — — — — 740 113 112 25 90 1080
FYROM — — — — 24 9 11 16 118 32 170 420 800
Total for five countries 4 96 139 192 523 588 473 2,524 2,844 2,045 2,380 2,478 14,286
Bosnia and Herzegovina — — — — — — — — 100 90 150 164 504
Croatia — — 16 120 117 114 511 533 932 1479 1115 900 5,837
Slovenia 4 65 111 113 128 177 194 375 248 181 176 442 2,214
Balkan region 22,841
Hungary 311 1,459 1,471 2,339 1,146 4,454 2,275 2,173 2,036 1,970 1,649 2,443 23,726
Poland (cash basis) 10 117 284 580 542 1,132 2,768 3,077 5,129 6,471 8 294 6,929 35,333
Czech Republic 132 513 1,004 654 869 2,562 1,428 1,300 3,718 6,324 4,595 4,500 27,599
Slovakia 18 82 100 195 269 308 353 220 684 390 2,075 2,000 6,694
Central Europe Visegrad
countries 93,352
Eastern Europe 479 2,332 3,125 4,193 3,594 9,335 8,002 10,202 15,691 18,950 20,434 19,856 116,193
Baltic states — — 119 238 460 454 685 1,142 1,863 1,139 1,173 1,457 8,730
CIS — — 1,777 1,875 1,770 4,065 5,288 8,856 6,726 6,735 5,367 7,021 49,480
Russian Federation — 100 1,454 1,211 690 2,066 2,579 4,865 2,762 3,309 2,714 2,921 24,671
Estonia — — 82 162 215 202 151 267 581 305 387 600 2,952
Latvia — — 29 45 214 180 382 521 357 347 408 257 2,740
Lithuania — — 8 30 31 73 152 355 926 486 379 600 3,040
Total above 479 2,332 5,021 6,306 5,824 13,854 13,975 20,200 24,280 26,824 26,974 28,334 174,403
Source: Author’s calculations and modifications based on national balance of payments statistics; International Monetary Fund, Balance of
Payments Statistics (Washington, DC), various issues and Staff Country Reports (available at www.imf.org); UNECE secretariat estimates.
Note: Changes in coverage are available in UNECE, Economic Survey of Europe, 2001, no. 1, ch. 5, box 5.3.1.
NOVEMBER–DECEMBER 2004
27
Table 5
Political Instability as a Barrier to Foreign Entry in Bulgaria
Multinational enterprise
country of origin
Europe
Greece and other Total
Political instability (Y64) no count 36 24 60

% within Y64 60.0 40.0 100.0
% within ORIGIN 97.3 88.9 93.8
% of total 56.3 37.5 93.8
yes count 1 3 4
% within Y64 25.0 75.0 100.0
% of total 1.6 4.7 6.3
Total count 37 27 64
% within Y64 57.8 42.2 100.0
% within ORIGIN 100.0 100.0 100.0
% of total 57.8 42.2 100.0
Table 6
Cultural Closeness as an Incentive . . . or a Barrier?

country of origin
Europe
Cultural closeness no count 22 27 49

as an incentive % within AX11 44.9 55.1 100.0
(AX11) % within ORIGIN 59.5 100.0 76.6
% of total 34.4 42.2 76.6
yes count 15 — 15
% within AX11 100.0 — 100.0
% within ORIGIN 40.5 — 23.4
% of total 23.4 — 23.4
% within AX11 57.8 42.2 100.0
% within ORIGIN 100.0 100.0 100.0
% of total 57.8 42.2 100.0
Table 7
Cultural Distance as an Incentive

country of origin
Europe
Cultural distance as no count 36 17 53

an incentive (AX12) % within AX12 67.9 32.1 100.0
% of total 56.3 26.6 82.8
yes count 1 10 11
% within AX12 9.1 90.9 100.0
% of total 1.6 15.6 17.2
% within AX12 57.8 42.2 100.0
% within ORIGIN 100.0 100.0 100.0
% of total 57.8 42.2 100.0
Table 8
Cultural Distance as an Incentive and the Sector of the Multinational

Enterprise
Type of business
productive/
industry services/ trade/
and textiles banks food Total
Cultural distance no count 20 16 17 53

(AX12) % within AX12 37.7 30.2 32.1 100.0
% within kind of 87.0 88.9 73.9 82.8
business
% of total 31.3 25.0 26.6 82.8
yes count 3 2 6 11
% within AX12 27.3 18.2 54.5 100.0
% within kind of 13.0 11.1 26.1 17.2
business
% of total 4.7 3.1 9.4 17.2
Total count 23 18 23 64
% within AX12 35.9 28.1 35.9 100.0
% within kind of 100.0 100.0 100.0 100.0
business
% of total 35.9 28.1 35.9 100.0
Table 9
Cultural Closeness and the Sector of the Multinational Enterprise
Type of business
productive/
industry services/ trade/
and textiles banks food Total
Cultural no count 20 14 15 49
closeness % within AX11 40.8 28.6 30.6 100.0
(AX11) % within kind of 87.0 77.8 65.2 76.6
business
% of total 31.3 21.9 23.4 76.6
yes count 3 4 8 15
% within AX11 20.0 26.7 53.3 100.0
% within kind of 13.0 22.2 34.8 23.4
business
% of total 4.7 6.3 12.5 23.4
Total count 23 18 23 64
% within AX11 35.9 28.1 35.9 100.0
% within kind of 100.0 100.0 100.0 100.0
business
% of total 35.9 28.1 35.9 100.0
Table 10
Historical Links and the Origin of the Multinational Enterprise
country of origin
Europe
yes count 1 10 11
Historical links no count 36 27 63
(AX9) % within AX9 57.1 42.9 100.0
% within ORIGIN 97.3 100.0 98.4
% of total 56.3 42.2 98.4
yes count 1 1
% within AX9 100.0 100.0
% within ORIGIN 2.7 1.6
% of total 1.6 1.6
% within AX9 57.8 42.2 100.0
% within ORIGIN 100.0 100.0 100.0
% of total 57.8 42.2 100.0
spite political conflicts between the two countries, for example, regarding the
name “Macedonia.” In the same context, Croatian MNEs are entering Serbia
and Montenegro and have developed strong trade relations, although these
countries have been enemies in recent history.
Conclusions
Economic development and structure before and during the communist period
are elements important to understanding the legacy of the communist era and
the significant problems they created in Bulgaria. Slow progress in Bulgarian
economic development, privatization, and institutional reform, and in overall
progress, has mainly been due to political instability resulting from nine
governments over a decade of transition, or, more significantly, due to the
inability of each government to adopt adequate measures and programs for
reform. Other countries, such as Poland, had changes in governments, but
each managed to live up to the requirements of the transition. The Bulgarian
governments were composed of opposing parties with different beliefs. On
the one hand, they would not take initiatives, fearing the inevitable negative
reactions of the people if painful stabilization policies were implemented, and,
on the other hand, they would accuse the opposing government of doing the
same. In this environment, the nomenklatura was strengthened, achieving eco-
nomic power, and the demonopolization, privatization, structural reform, and
restructuring of the state-owned enterprises were delayed along with the
country’s economic progress.
The remarkably large amount of capital invested by Greek companies in
Bulgaria seems surprising in terms of the size and strength of the Greek
economy, but this can be explained. First, there is extreme interest on the
part of a few large Greek multinational companies such as OTE/Cosmote,
National Bank of Greece, and Hellenic Bottling Company (Coca-Cola–HBC/
3E) and their huge economic power in comparison with Greek and Bulgar-
ian economies. Second, there is an absence of Western investment interest
and lack of local competition, knowledge of the market, strong historical
ties, and “previous” trade relations together with geographical proximity of
Greek entrepreneurs.
Communism in Bulgaria affected the cultural and social mentality as well
as the business attitudes of the people. On the other hand, Greece came closer
to Western culture and the capitalist view of economics—the open market. All
of the above paved the way for exploiting geographical proximity and open-
ing up investment opportunities, of which Greece was much more ready to
take advantage.
Geographical proximity, strategic importance, and existence of a large Turk-
ish minority in Bulgaria seem to be the main reasons explaining why Turkey
has carried out a moderate investment policy with regard to its neighboring
country. One can surmise that Turkey would have had a better share in FDI
inflows in Bulgaria—ranked eleventh in volume of U.S. dollars with US$135
million, excluding offshore projects that elicited intense Turkish investment
interest—if Turkey had a stronger economy. In addition to that, the low-level
Turkish investing presence in Bulgaria can be explained by the traditional
hostility between the two countries. In 1998–2002, there was a significant
increase in Turkish FDI inflows and improvements in Bulgarian–Turkish bi-
lateral relations, which have been ratified by signed agreements. The con-
troversial elements of the Turkish–Bulgarian relationship are summarized
below.
In 1999–2002, Russian FDI inflows to Bulgaria were significant. Russia’s
relationship with Bulgaria goes back to before the communist years and has
traditionally been friendly. Although the economic situation of Russia is not
good at the moment and has not been good for most of the transition years, the
FDI outflows from Russia to Bulgaria are significant: US$205 million, ex-
cluding offshore projects with intense Russian investment interest. One may
argue that the former Soviet Union abandoned Bulgaria during the crucial
years of the transition, but the fact that the former Soviet Republics were them-
selves trying to recover from the dissolution of the Union and the dissolution
of the CMEA trade organization should be taken into account.
An unexpected outcome is limited German FDI inflows in Bulgaria. Bul-
garia and Germany have had a friendly relationship, which is based first on
the economic help given to Bulgaria by Germany after the two Balkan wars
and, second, and more important, on Bulgarian participation on the German
side during World Wars I and II. Throughout the twentieth century, the German
Democratic Republic (GDR) has been an important trade partner with Bulgaria,
and the GDR’s unification with West Germany resulted in Bulgaria’s loss of a
significant trade partner. However, geographical distance and other more favor-
able destinations for German MNEs, such as Poland, Hungary, and the Czech
Republic, may explain limited German investment interest in Bulgaria.
Nevertheless, statistical data support the argument that the four countries
studied in this article, Germany, Turkey, Greece, and Russia, have invested
altogether, in Bulgaria, around 50 percent of total FDI inflows.17
Finally, the fact that strong Western economies such as Germany’s are not
in first position on the lists of FDI inflows to Bulgaria is not as surprising as
the fact that Greek investments dominate the Bulgarian market. However,
this occurred mainly because of geographical proximity, cultural closeness—
at least closer compared to other EU or Western countries—and lack of for-
eign competition. Bulgaria and the Balkan region provided the opportunity
for Greek enterprises to become MNEs and to use them as an export base,
because Greece, as a member of the EU and NATO, is the most advanced
country in the region of Southeast Europe and especially in the Balkans.
Another advantage for Greek investors in the CEE region is that their knowl-
edge of the market raises their possibilities of handling the difficulties of an
“underground” or “gray” market, coping with bureaucracy, and overcoming
corruption, bribery, and so forth.
Our findings regarding the importance of cultural closeness together with
the importance of strong historical links and strong cultural ties are in accor-
dance with Andersen (1994), SECI (1998), and Altzinger (1999). The absence
in our findings of political instability as a major barrier to the accumulation of
FDI inflows to Bulgaria can be explained on the basis of Bulgaria’s political
instability from the start of its transition up to 1997, which included eight
governments over seven years. Bulgarian political instability was not evident
during the time this survey was conducted, 1998–99. Moreover, we argue that
sometimes people consider political instability equivalent to government in-
stability, thus ignoring institutional or structural instability.
The general findings of our survey regarding the significance of geographi-
cal proximity are in accordance with Pye (1998), Iammarino and Pitelis
(2000), Andersen (1994), Meyer (1996), and SECI (1998). Geographical
proximity and the importance of low labor cost for export-oriented compa-
nies were also in accordance with Lankes and Venable (1997) and Iammarino
and Pitelis (2000). Our findings suggest that geographic proximity is the
most decisive factor in the accumulation of FDI inflows to a country; on the
other hand, historical links do not prove to be an important factor. Cultural
closeness/distance are still questionable issues, and this study supports the
fact that the origin of multinational enterprises does not play any role as an
incentive or a barrier; it is the specific industry that each MNE belongs to
and the specific products that are offered in order to serve the local market
that play a stronger role. However, in the most common cases, cultural close-
ness, common religious beliefs, and the existence of minorities in the host
country have helped in the establishment of a significant number of FDI
projects: about 6,400 Turkish MNEs, more than 4,000 Russian MNEs, and
around 3,800 Greek MNEs. Political instability is not a barrier to foreign
MNEs according to our survey findings.
Notes
1. Some of the converted villages retained their Bulgarian language, while others
became entirely Islamicized and Turkified and spoke Turkish. These people are known
as Pomaks.
2. According to Neuburger (1997: 5), 140,000 Turks moved across the Bulgarian
southern border into Turkish territory. According to Snavely and Chakarova (1997:
312), the number was 150,000.
3. According to Crampton (1997), 344,000, according to Snavely and Chakarova
(1997: 312), more than 300,000, according to Neuburger (1997: 6), about one-half of
Bulgaria’s 900,000 Turks, according to Bell (1997), 300,000.
4. In these elections, about 200 parties were registered, including seventeen Agrar-
ian Unions. The BSP came in first with 47.15 percent—some other sources state that
the BCP was first with 45.6 percent and the UDF second with 36.6 percent, BANU
third with 7.8 percent, and MRF fourth with 5.8 percent—or 2,887,766 votes, and the
UDF with 36.20 percent was in second place with 2,317,798 votes (Bell 1997: 369, table
9.2). Although the election results disappointed the UDF, the opposition dominated
Bulgaria’s capital and other big cities. The third party was BANU, which cooperated with
UDF, with 8.03 percent.
5. The UDF suspended the BSP and claimed that the BSP had managed to add
500,000 votes to its total. This has never been proved, and some parallel vote counts
confirmed the official results. Crampton (1997: 219) stated that Zhelev had announced
the following regarding the elections of June 10–17, 1990: “The elections have been
‘free but not fair’ . . . because BSP used unfair propaganda among the rural voters who
were dominated by local party bosses.” Berov (1993) argued that the UDF did not win
the first democratic elections in Bulgaria mainly because of vote fraud and manipula-
tion of a part of the voters, especially in the villages. It is also true that the UDF was
dominated by center-left figures, usually intellectuals and former dissidents, many of
whom had once been members of the BCP. This means that it was not a pure demo-
cratic party (Bell 1997: 370; Berov 1993: 87–100).
6. In 1990, the northwest province of Slovenia voted the communist party out of
office. In 1991, Slovenia won its independence from the rest of Yugoslavia. In 1991,
Croatia also made a bid for independence. Croats and Serbs started a civil war. In 1991,
FYROM also declared independence. It was admitted to the United Nations under a
provisional name in 1993. In 1992, Bosnia-Herzegovina also declared independence. A
civil war among the Croats, Serbs, and Muslims erupted.
7. The BSP, a coalition of the Democratic Left, took 43.42 percent, or 2,258,249,
of the votes, and the UDF took only 24.23 percent, 1,260,374, of the votes. The votes
that went to the Popular Union were only 6.51 percent, 338,478 of total votes, and to
the MRF only 5.44 percent, 283,094 of total votes. All other parties failed to pass the 4
percent in order to be represented in the parliament. Voter turnout was 75 percent.
8. In the first round of the presidential elections on October 27, 1996, Peter Stoyanov,
who had already been put forward by the UDF leadership, received more than 44 per-
cent of the vote, while the socialist Ivan Marazov’s team got 27 percent. At the runoff
on November 3, 1996, Peter Stoyanov was elected president of the republic with 59.73
percent of the popular vote. On January 19, 1997, Stoyanov was sworn in as president
before the National Assembly, and on January 22, he officially took office.
9. Following consultations at the president’s office, on February 10, 1997, the par-
liamentary forces backed a joint declaration agreeing to dissolve the current parliament
and to hold early elections in April that year. The next day, they signed the document,
also declaring their support for steps to be taken by a caretaker cabinet.
10. According to the official results of the April 19 parliamentary elections, the United
Democratic Forces and its leader Ivan Kostov gathered the largest number of votes,
2,223,714, or 52.26 percent of the total of 4,255,301 valid votes cast, and the BSP was in
second place with 22 percent. This 52 percent secured 137 of the 240 seats in the National
Assembly for the UDF. The UDF won an absolute majority and has two and a half times
more seats than the Socialist Party. All major social groups and interests are represented
in the new parliament, which is one positive result of the elections. Moreover, the new
parliament has a strong working majority and an even broader reformist majority of par-
ties, which, even in opposition, support the aims of the reforms.
11. The Central Electoral Commission (CEC) presented the results of the general
elections held in Bulgaria on June 17, 2001. It reported the number of eligible voters at
6,877,502 and the number of votes submitted at 4,607,769. This means that 67 percent
of those eligible voted. Fifty parties and coalitions registered to participate in the elec-
tions, and thirty-six of them actually took part. Votes and mandates were distributed as
follows: National Movement Simeon II—1,951,859 votes, 42.73 percent, 120 seats;
United Democratic Forces—830,059 votes, 18.17 percent, 51 seats; Coalition for Bul-
garia—783,107 votes, 17.14 percent, 48 seats; Coalition Movement for Rights and Free-
doms—340,510 votes, 7.45 percent, 21 seats. Furthermore, the CEC announced the
final results of the second round of presidential elections on November 18, 2001. The
team of Petar Stoyanov and Nelly Koutskova won 45.8 percent of the votes and the
team of George Purvanov and Angel Marin, 54.1 percent. The share of voters was 55.05
percent, and the number of invalid ballots was 8,917.
12. The author argues that this large percentage is biased and that it depends on the
sample: it is likely that participation included a large enough number of companies
belonging to a sector that prefers a skilled labor force.
13. Our questionnaire was based on the theory of Dunning (1988, 1993). Our ques-
tionnaire was also based on the universal model that appeared in Bitzenis (2003b). The
questions were initially selected based on Dunning’s theory, but necessary amendments
were made during the eighteen-month research period. The research began in January
1998; six months were needed for constructing the questionnaire, studying the theories,
deciding how to contact the companies, and creating the sample. Twelve months were
needed for the interviews and statistical analysis of the results of the questionnaires.
14. Its purpose was to identify the kinds and the types of incentives and entry barri-
ers for inward foreign direct investment, that foreign MNEs considered in order to
establish whether or not they should make an investment in Bulgaria. Moreover, this
questionnaire research has tried to identify Bulgarian business conditions/factors (ob-
stacles and incentives) that have been considered by foreign enterprises entering Bul-
garia. It is obvious that these factors were examined by MNEs in order to become
familiar with the Bulgarian business environment and thus have more successful in-
vestment projects. From an official document of the Bulgarian Foreign Investment
Agency (BFIA), a list of 110 foreign companies was found. This list contained the
enterprises that, according to the BFIA, had invested over US$1 million per MNE in
Bulgaria up to mid-June 1998. The total invested capital from these enterprises amounts
to around 70 percent of the total volume of foreign investments in Bulgaria at that time;
at the end of 2001, more than 75 percent.
15. The usual method of replying to questionnaires via the postal service has failed
in research studies. Only 4.7 percent of companies replied this way. The best response
rate came from individual interviews, totaling 35.9 percent of the total response rate,
followed by e-mail at a rate of 29.7 percent. Fax and telephone methods combined were
successful in about 30 percent of cases. Because of the poor response rate by post,
despite the fact that the questionnaire was sent to all the companies, and the possibility
of failure to collect sufficient data, a multiple approach to the target group was under-
taken involving application of some pressure through various methods of contact and
attempts to get their attention.
16. From the questionnaire survey, the service sector accounts for 28 percent and
FDI inflows to Bulgaria in the same sector were 18 percent: finance 11.4 percent plus
tourism 5.1 percent plus telecommunications 1.8 percent = 18.3 percent. Trade in the
questionnaire survey accounts for 36 percent, and FDI inflows to Bulgaria in the same
sector were 19.2 percent. Finally, responses from the industrial sector were 22 percent
and textiles 14 percent, totaling 36 percent, and, at the same time, FDI inflows to Bul-
garia in the industrial sector amounted to 55 percent of the total.
17. Up to October 2003, FDI outflows to Bulgaria from Greece were US$1 billion,
from Germany, US$676 million, from Russia, US$209 million, from Turkey US$135
million, and from offshore centers, US$350 million.
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Explanatory Variables for Low Western Investment Interest in Bulgaria

Article in Eastern European Economics · November 2004

10TH INTERNATIONAL CONFERENCE INTERNATIONAL BUSINESS 2019 View project

Greece: Foreign Direct Investment View project

The user has requested enhancement of the downloaded file.

Explanatory Variables for Low Western

ABSTRACT: The understanding of a country’s past is important in the process

The understanding of a country’s past is important in the process of analyzing

The author is a lecturer at City College in Thessaloniki, Greece, an affiliate of the

considerations is the social and cultural characteristics of the population and

Bulgaria’s Historical Links with Greece, Germany, Turkey,

Bulgarians to Christianity and the introduction of the Cyrillic alphabet, a way

there is a significant absence of Western products, even German products.

another attempt to assimilate the 800,000 Bulgarian ethnic Turks by obliging

Foreign Direct Investment by Countries and by Years (in million USD)

Rank 2003 Total by

Source: Bulgarian Foreign Investment Agency 2004.

Distribution of Foreign Investors in Bulgaria by Regions (number of foreign

Turkey Russia Greece Germany Cyprus

Total by countries 6,366 4,004 3,746 1,554 475

Source: Bulgarian Foreign Investment Agency 2003.

As mentioned above, the end of World War II in 1944 found Bulgaria in a

Are Political Instability and Government Inability/

Bulgarian Governments, 1990–2002

Bulgarian Prime Ministers Bulgarian Presidents

5. Renata Indzhova October 18, 1994–January 24, 1995 Caretaker government

Source: Author’s research, various sources.

national market position of Bulgarian companies following the disintegration

Literature Review of Other Questionnaire Surveys

This section contains a short literature review in order to present question-

Meyer (1996) found that market-oriented investors in Hungary regard po-

Questionnaire Survey Outcomes

For the purpose of examining whether political instability, cultural distance,

market size 93.8%

acquisition of assets 37.5%

Figure 2. Most Important Barriers, Obstacles, or Disincentives for Bulgarian

unstable legal system

limited purchasing power, low GDP per capita 50.00%

high value-added tax, high taxation 29.69%

low progress in transition 15.63%

Overall, interest in investments on the part of Western developed countries

Statistical Analysis of Questionnaire Findings

Bulgaria 4 56 42 40 105 90 109 505 537 819 1002 651 3,960

Political Instability as a Barrier to Foreign Entry in Bulgaria

Political instability (Y64) no count 36 24 60

Cultural Closeness as an Incentive . . . or a Barrier?

Cultural closeness no count 22 27 49

Cultural Distance as an Incentive

Cultural distance as no count 36 17 53

Cultural Distance as an Incentive and the Sector of the Multinational

Cultural distance no count 20 16 17 53

Cultural Closeness and the Sector of the Multinational Enterprise

Historical Links and the Origin of the Multinational Enterprise

Altzinger, W. 1999. “Austria’s Foreign Direct Investment in Central and Eastern

Bulgarian Nation (1878–1995).” East European Quarterly 31, no. 1 (March).

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