Greece, with average temperatures of over 30 degrees in summer, has attracted Microsoft and Google to build powerful data centers. The electric Citroen C3 will be made in Serbia. Ford models are produced in Romania. The Chinese car manufacturer BYD is building a plant in Hungary, and Intel is investing 4.6 billion euros in a plant in Poland.
This is only a sketchy picture of the competition to attract foreign investment in Eastern Europe.
Bulgaria also participates in this competition. However, investors often seem to look at it and then bypass it. The clearest example of recent years is Volkswagen, which, despite the country’s membership in the European Union, chose Turkey. Subsequently, the pandemic and other factors prevented the German concern from expanding in the region, but the lesson was learned – Bulgaria has structural problems and cannot rely only on its membership in the EU to attract the giants.
Why are investments bypassing us?
Political instability, lack of clear legislation and frequent changes to it, cumbersome administrative procedures, low efficiency of institutions and lack of long-term and strategic planning of investment activity in the country. These are one of the main problems of potential investors, according to Dimitar Zlatinov, Associate Professor, Doctor of Economics, Deputy Dean of the Faculty of Economics of Sofia University. He stresses that each of them is important, as is the ever-increasing competition in the region.
In the textile industry, for example, we missed opportunities to re-locate production of leading global brands from Western Europe to countries in the Far East (such as China, Vietnam and Cambodia), which benefited countries in the region such as Turkey, Romania and the Czech Republic “, the economist points out.
He gives as an example the failure to attract Volkswagen, which
showed that the small size of the market and the increasingly limited human resources in Bulgaria are also leading problems for investors”.
All this leads to one of the most important economic problems that Bulgaria has – low investment activity
and this will increasingly be a serious constraint to growth in the digital age we live in.’
The delay in the funds under the Recovery Plan also has an adverse effect, along with the stock of savings in the banking system and the reluctance to reinvest the profit from foreign investments in Bulgaria. However, according to Zlatinov, the debate on these issues is “inert”,
which suggests the lack of a long-term strategy for the country’s development”.
Record investments in 2023?
The new year began with loud statements from the already departed government that record foreign investments were made in Bulgaria last year. This is far from the truth, because the attracted foreign investments are incomparable to what was observed in the period before the global financial crisis of 2007-2008, when, with the impulse of the upcoming entry into the European Union, they touched 30% of the GDP.
However, statistics show an acceleration in the growth of foreign direct investment (FDI) to 38% annual growth in 2023. Thus, for last year they exceed BGN 7.1 billion and amount to 3.85% of GDP.
A breakdown shows that the majority of them actually are reinvested profit from already established foreign companies in Bulgaria. Last year, this type reached BGN 6.5 billion, and in the years after the COVID pandemic, an increase in the share of reinvested profit from foreign investments was observed.
But the exported income from direct investments from the country for 2023 is BGN 12.7 billion, or 6.9% of GDP. This is an extremely unfavorable trend, which deepens with each passing year,” Zlatinov points out.
According to him, this is precisely what prevents the restructuring and mass application of digital technologies in the production process, which is mandatory for the construction of a modern economic system, fully integrated in global supply chains in line with the concept of Industry 5.0.
The structure of foreign direct investments in 2023 shows that approximately 57% of them (about BGN 4 billion) are from four countries – Switzerland (22%), Austria (13%), the Netherlands (12%) and Belgium ( 10%). Bulgarian exports to these countries are 8% of the total, reaching BGN 6.95 billion.
Thick clouds over Germany over the past year saw foreign direct investment from there shrink to 2.5% of the total from 24% in 2018.
The predominant share of all FDI is in the financial sector (42%), of which they are a part the banks with the record profit for 2023. It is followed by the manufacturing industry (36%), which continues to be the structural determinant of commodity exports, with only 2.3% in professional activities and scientific research, which have the long-term potential for technological renewal of the economy.
In direct connection with the cheapening of energy resources, direct foreign investments in the energy sector are decreasing.
Such a structure of foreign direct investments cannot be defined as sustainable and generating potential for long-term economic growth, which is also the reason for the high outflow of profit from foreign direct investments from the country,” Zlatinov is emphatic.
Low tax is not enough
Despite the growth for the past year, the bigger picture shows that for more than 15 years, the accelerated dynamics of direct foreign investments to the country from the period before Bulgaria’s accession to the European Union cannot be restored. In addition to the traditional local reasons, the effect of the global financial crisis, as well as the subsequent upheavals in the Eurozone, is still a factor.
It is obvious that maintaining a corporate tax rate of 10% is not enough to attract much more foreign investment,” Zlatinov points out.
Let’s compare
In comparative terms, the share of investments to GDP is comparable to the average level for the Eurozone, but this is not particularly good, considering that the purchasing power in Bulgaria is only 60% of the Eurozone average.
The melting of this difference implies much higher rates of economic growth and, respectively, higher investment activity to drive this growth,” Zlatinov points out.
The forecasts of the European Commission are that economic growth in Romania will accelerate against the backdrop of slowing inflation and a substantial increase in investments in the country in 2024 based on financing from European funds and programs, which is not expected to happen in Bulgaria.
In both Romania and Croatia, with which Bulgaria is often compared, gross capital formation is higher as a share of GDP relative to Bulgaria and ahead of the Eurozone average.
Actions are needed, not words
Political and legislative stability, sustainable reforms for quality education and health care, a functioning judicial system, directing funds from European funds and programs in projects with long-term potential for developing the economy in conditions of digital and green transition, building road infrastructure. These are just some of the things that the state should do in its quest to increase investment activity in the country.
Tags: foreign investments bypassing Bulgaria
-
