FDI in Bulgaria: Dynamics and Opportunities for Korean Businesses

Assoc. Prof. Dr. Daniela Bobeva Economic Research Institute at BAS

Outline

• IER priorities and experience in foreign investment research and foreign trade

• What we do and we do not know about foreign investment to/in Bulgaria

• Bulgaria-Korea economic relations: why researchers have to help

FDI research: Hitting a moving target

Research on foreign investment has always been a priority in IER strategy and programmes since early 90-ies

Early 90ies: opening for FDI as a pillar of market economy emergence and a key instrument in the transition reform agenda

Mid 90-ies: privatisation and the role of FDIOn the road to the EU membership: convergence and EU markets:

FDI as an instrument of EU integration and a tool for strengthening the single EU market;

Crisis and FDI: FDI and exit from the recession; more research focus on the FDI companies; targeting new FDI source countries

Relocation of Western companies in Bulgaria

• FDI and intercompany relations after the EU accession (Professor Goev, Associate professor Minchev (2009-2011): Studying 100 foreign investment companies in Bulgaria compared with the same data from 2001. Assessing the relations between the Bulgarian and foreign companies.

Promoting competitiveness of Joint ventures in Bulgaria

Dr. Marangozov . The study focuses on competitiveness and Joint ventures in the context of local and European practices and legislation.

Structuring Balance of Payments

• Prof. Minasian : The study results in a comprehensive set of policy measures to improve macroeconomic policies and synergies between different polices that serve for macroeconomic and financial stability and balancing externalities.

FDI in Central and Eastern Europe

Professor Balkanska: A comprehensive analysis of specific factors that drive FDI in CEECs and particularly in Bulgaria. The most attractive sectors are Identified, as well the important sectors that lack foreign investment are presented. The research proves that the economic growth is strongly dependant on the FDI flow in Bulgaria due to the high level of openness of Bulgarian economy. Key policy measures are offered.

• Foreign Direct Investments In Bulgaria: Do They Have An Effect On The Economic Development of The Country? Christova-Balkanska, I., 2009, N 1, p. 197-218. ISSN: 0205-3292

Intensity of FDI

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-5

0

5

10

15

20

25

30

35

БългарияЧехияЕстонияЛатвияЛитваУнгарияПолшаРумънияСловенияСловакия

Striking facts about FDI in Bulgaria

Bulgaria and Estonia are leading in the EU as per the intensity of FDI inflow in last 12 years

FDI inflow 41,279 m euro 1998-2013FDI stock 38,331 m euro 2013. But

unfavourable sector distribution Bulgaria is the only EU country in the

top ten in the world for outsourcing

Bulgaria offers large advantages for FDI: lowest tax level, no currency risk, lowest labour costs in EU, but

In 2013 Bulgaria is among the 3 hot spot for start-ups in Europe for 2013

The BG economy is hospitable and demonstrates a large absorption capacity for FDI

Large opportunities in several sectors - industry, natural resources, agribusiness .

Growing outsourcing – is this always linked with FDI

These advantages drive low skills, labour intensive productions. Insufficient investment in innovation . Last place in EU according to the innovative FDI

Start-up and innovation a priority for FDI

Similar FDI challenges in both countries

• Korea received USD 98 bn FDI in 2013• Insufficient FDI in value added sectors • Low contribution FDI companies in the exports

(Korea 20%, Bulgaria 17%) • FDI companies engage only 6% of labour force in

Korea and 14% In Bulgaria.• Common strategies to rely on FDI for acceleration of

the economic growth • Decreasing inflow from deteriorating euro area

economies need to be compensated. Where from?

Asian economies as a source of FDI ?

• Traditionally Japan was considered as a country that largely invests aboard but the last two decades put on the stage other Asian countries

• China and Republic of Korea invest abroad more than received inflow

• India, Pakistan and Vietnam FDI inflow is still larger than the outflow but the FDI is growing. Their current account deficits are largely covered by the FDI inflow

• Internationalisation of fast growing Asian economies takes time. Realistically, FDI from R Korea, China and Japan could be encouraged in a short

Asian FDI in Bulgaria

• FDI stock from China, R Korea, Japan, Vietnam and India represent only 1% of total FDI stock in Bulgaria (2013)

• R Korea is leading FDI investor in Bulgaria among the five Asian countries

• The crisis impacted negatively the FDI inflow from the Asian economies

FDI stock in Bulgaria from Asian countries in 2013 (m euro)

3% 26%

27%

44%

0%

India China Japan R Korea Vietnam

Direct investment inflow from Korea to Bulgaria

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-Q1

-20

-10

0

10

20

30

40

DI outflow from Korea to CEECs

2004 2006 2007 2008 2009 2010 2011 2012

-100

0

100

200

300

400

500

600

Slovakia PolandHungaryCzech R.Bulgaria

FDI inflow in Bulgaria from R Korea

• Only 250 m euro inflow FDI for the last 18 years followed by China 205 m euro

• Disproportionately small inflow in Bulgaria as compared to the other CEECs

• Very unstable inflow• Incidents of disinvestment (three years)• Only large multinational companies involved• In general, less Korean presence in smaller economies .

Largest FDI to large OECD countries.• Negligible Bulgarian FDI inflow in Korea (USD 600 thousand

in 2014)

Success versus unsuccessful stories

• Unsuccessful stories: LB Bulgaricum, Photovoltaic investment, etc. too many mistakes!

• Failures lead to a higher risk perceived. Resolving the trouble cases as a toll for encourage further investment

• Good cases?

Similar policies in FDI promotion

• Improvement of FDI environment – cutting the administrative burden; increasing predictability

• Appropriate infrastructure • Incentives for investment in value added

sectors; creation of R&D centres.• Concessions for job creating investment • Promoting value chain investment

How to boost FDI

• More research on synergies between both economies is needed for the purpose of identification of demand/supply potential and diversification of FDI inflows

• Field work is needed to clarify the success and failed investments and learn the lessons

• Involvement of SMEs in internationalisation seems a common problem. How to encourage SMEs cooperation?

• Innovation cooperation needs innovation • How better benefiting from the Free Trade Agreement?• Financing FDI - instruments , risk mitigation

Total bilateral trade RB and RK(m USD)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 20140

50

100

150

200

250

300

350

R Bulgaria: Export to/Import from R Korea

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 20140

50

100

150

200

250

ExportImport

Bilateral trade• Trade between the two countries substantially increased in the last

decade and more pronounced after 2006• The trend has been volatile since 2007 which is associated with both

export and import dynamics• The recent financial and economic crises impacted strongly the

export and at much lesser extend the import from Korea • The EU – Korea Trade agreement has a little impact on bilateral

economic relations • The export of Bulgarian goods is caching up with the import from R

Korea and the trade between the two countries converge to achieve a balance

• Prices of metals strongly impact the total trade between the countries

Favourable legal framework

• The Free Trade Agreement between EU and R Korea signed on July 1, 2011 is the first with an Asian country which is expected to boost bilateral trade. But it does not happen automatically. The agreement creates only opportunities. The information is needed to be spread among participants and also discussions aiming at mutual understanding should take place

Institutional framework in place

• Sofia Office of Korean Agency for Export and Investment Promotion / Корейската агенция за насърчаване на търговията и инвестициите (КОТРА) contributes to bilateral relations

• In 1990 Bulgaria- Korea Committee for Economic Cooperation

Challenges

• Still bilateral trade is below the potential • Overconcentration of bilateral trade in few

goods: over 80% of export to R Korea are metals and 40% of import are diodes and chemicals

• Non tariff restrictions• Transportation costs • Financing tools

How to increase bilateral trade

• More research on absolute and competitive advantages of both economies and their synergies and complementarities

• Trade of foodstuffs and machines create larger opportunities . More cooperation between food control authorities

• Removal of remaining barriers• Trade finance instruments need to be employed. More active

support from financial institutions.• Transportation and other costs of trade to be reduced • More stronger and targeted support to excporters from both

countries• More trade will encourage more investment

Way foreword

• Current trade and economic relations offer many challenges from researchers’ point of view

• Although favourable legal and institutional framework is in place bilateral relations need further boosting

• Identifying main areas with high potential for bilateral trade and FDI

• Studding the obstacles, extend best practices

Thank you !Let’s answer the questions

together