Bulgaria: Striking A Balance

Bulgaria has several appealing characteristics for foreign investors looking to set up operations in the country: A sympathetic government attitude toward FDI, and low taxes, set the tone for stable growth in gross domestic product. Bulgaria also has relatively low-cost labor, incentives for investment and no restrictions on foreign ownership.

Steady financial transfers from the EU also boost the economy. “It depends on the sector, but what it means is that gradually the purchasing power of Bulgaria’s consumers is expanding,” explains Dimitar Bechev, currently a research fellow at the University of North Carolina and director of the Sofia-based European Policy Institute. With much of Bulgaria’s growth driven by exports, many companies target increased exports to the EU, he adds.

Plus, Bulgaria’s EU membership gives access to the other 27 member countries. “Bulgaria is not very far from core markets,” Bechev says. “You can manufacture locally in Bulgaria and sell in the highly lucrative market of nearby Germany. For all intents and purposes, it’s the same market.”

Such factors have attracted blue-chip firms like Kraft Heinz, McDonald’s and Microsoft from the US, RAO Gazprom from Russia, France’s Carrefour Group, Mitsubishi Heavy Industries from Japan and South Korea’s Hyundai Motor Company.

Still, problems engendered over decades can’t be erased overnight. “Corruption is continuing and is becoming more evident,” says Georgi Kalchev, associate professor at the American University in Bulgaria. “FDI is down a huge degree—huge,” he emphasizes in an interview from Blagoevgrad. “Foreign investors have no trust in this environment.”

In the early to mid-2000s, Bulgaria’s inbound FDI soared from less than $1 billion to a peak of $13.88 billion in 2007, according to World Bank data. But during the global financial crisis it tumbled, leveling off at around $1.5 billion to $2.7 billion in the years since 2010—not as good as the best years but 100% better than the average prior to 2002.

“Corruption is endemic,” in the judiciary and in at least two of Bulgaria’s most crucial sectors—infrastructure and energy— according to the US State Department. This was highlighted when Czech state-owned energy giant CEZ exited the Bulgarian market, selling its assets to a small company called Inercom Bulgaria, founded just one year earlier by an individual with no experience in the energy business but a 20-year friendship with the energy minister, Temenuzka Petkova. Petkova resigned, although she disavowed any wrongdoing.

Additionally, some EU cash transfers are diverted away from legitimate projects, according to Bechev. “Politicians find ways of diverting EU money,” he explains. “You can ask yourself how much a kilometer of highway costs in Germany and how much in Bulgaria.” He says Bulgaria’s higher cost is due to kickbacks.

The infrastructure problems can be severe. This past August, the government forced the resignations of three ministers following a bus accident that resulted in 17 deaths and numerous injuries. Multiple factors contributed to the crash—including poor workmanship and inadequate inspections.

Bulgaria’s low labor costs are a double-edged sword that attracts some investment but is also contributing to the country’s steady population decline, from about 8.8 million in 1990 to about 7 million in 2017, as skilled workers find better opportunities and higher salaries elsewhere.

“A lot of people are leaving Bulgaria,” Bechev says. “If you’re looking for qualified skilled labor in manufacturing, you might have trouble getting the right people.”