InvestBulgaria Agency, Bulgaria's state-run investment promotion company, has been sounding the trumpets of jubilation over soaring foreign direct investment (FDI) volumes. Yet this came as there were many alerts by experts over concerns Bulgaria was yet to ascend international investment attractiveness rankings, heavy speculative capital inflows and little spending on industry.

Indeed, in the past three years Bulgaria has been racking up stellar FDI in absolute terms. In 2004, the volume of investments, two billion euro, accounted for a quarter of total FDI volumes for the period 1992-2004 ($10.145 billion). Since then, the volume of investments in absolute terms has tested each previous high with double-digit year-on-year growth.

The year 2007 was no different. In mid-January this year, InvestBulgaria Agency announced the volume of FDI in 2007 rose by 20 per cent on the year to 5.2-5.3 billion euro, according to preliminary data. What was more, Bulgaria had attracted a fifth of total investments in the South-East European region.

A breakdown of FDI by sectors and a review in terms of the capacity of attracted funds to boost GDP, however, saw that the situation had changed little since 2004. Then, when the country attracted smaller volumes, investments had a more pronounced focus on industry and manufacturing. Now investments into industry, a cornerstone of the Bulgarian economy, have come down to a trickle and its share in GDP structure has stagnated at 30 per cent since 2004.

The current optimistic statements for FDI upturn are wound back to reality by international cross-comparison.
 
From a bird's-eye view
A pan-European survey on the appeal of countries to venture and private equity investors, issued in the middle of January, saw Bulgaria among the poorest performers. The survey, carried out by Navarra (Spain) University and Strategic Capital Management, measured a country's attractiveness in terms of investment opportunities, market size, growth forecasts, the capital market, tax conditions and local business sentiment. With 100 points as the benchmark, Bulgaria ranked third to last with 79 points, Romania and Greece holding the bottom two places (with 77 and 69 points, respectively).

Hungary, the Baltic states and Poland were the top performers in Central and Eastern Europe (CEE). The average score of the entire Central and East European region being 85 points.

The drawbacks of Bulgaria, in particular, were the immature capital markets and small liquidity. This all came alongside the slower development of entrepreneurial activities and the high social security contributions, among others.

Bulgaria also ranks low Europe-wide in terms of investments into information and communication technologies (ICT), as well as in research and development (R&D). Eurostat statistics showed Bulgaria spending a mere 0.50 per cent of GDP on R&D, which was a short call from the EU target of three per cent for CEE. In this regard, Bulgaria shared the fate of other countries in the region, whose average spending was below one per cent of GDP.

Spending on ICT had also been low-key in the past few years. With investments being at 0.8 per cent of GDP in 2005 and one per cent in 2006, Bulgaria spent half what Sweden and Italy did (at current prices) in 1980 showed analysis on ICT spending and investment in enterprises, prepared by the National Statistics Institute.

Structural imbalances
Experts said that despite the huge investment volumes, more than half of it had been infused into speculative capital. This type of investment brought little good to the Bulgarian economy, as it did not encourages growth in domestic output, in productivity or the creation of new jobs. This striped the FDI all-time highs of constructive import, experts said.

In 2007, tourism and real estate accounted for more than 60 per cent of the foreign direct investments, with both sectors enjoying double-digit growth, according to InvestBulgaria Agency. According to Stoian Stalev, head of InvestBulgaria Agency, the trend would be sustained because the two markets offered opportunities to make fast money.

"Industry can rely on a 10-per-cent return on investment whereas developers scoop 100 per cent returns," Stalev told media.

Experts also said financial services and trade, accounting for another fifth of investments, referred to inter-company transfers from foreign parent companies. Naturally, such investments led to subsequent - and larger - outflow of funds.

Industry, on the other hand, which was the winner of the bulk of investments in the years before 2004, had seen its share of total FDI dwindle to a mere 804 million euro in 2007. This had crippled its ability to add growth to the Bulgarian economy. For this reason, its share of GDP since 2004 had remained at 30 per cent.

Rectifying measures
The imbalance in the FDI structure prompted InvestBulgaria agency to take measures to stem investments in the tourism, real estate and services sectors. The agency would no longer provide government support to these sectors, although investors who earned a Class A or B investment certificate would still be entitled to acquire private or municipal property without a competitive procedure or a tender. Investors, however, would be stripped of the right to acquire such real estate for free, as the Investment Promotion Act read before the latest changes.

The agency also removed energy-inefficient production processes such as steel extraction, shipbuilding, coal mining and conventional oil and gas-fuelled production from the list of industries that could be given state support. Instead, InvestBulgaria would focus on industry related to and projects on renewable energy resources (to ensure Bulgaria achieved the target of 20 per cent of total energy output coming from environmentally clean energy).

The measures mapped out by InvestBulgaria Agency were insufficient to push industry out of stagnation. Nor were they sufficiently aimed at the conscious employment of FDI into GDP-boosting mechanisms. Experts expressed hopes that the Bulgarian Government would shortly produce a strategy similar to that of Poland, Hungary or the Czech Republic that would boost the number of industrial heavyweights that saw Bulgaria as a preferred destination.