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Foreign Direct Investments in Bulgaria - Assignment Example

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The object of analysis for the purpose of this paper "Foreign Direct Investments in Bulgaria" is the Republic of Bulgaria, one of the fastest growing developing countries in Europe.  A NATO member since 2004, it aims to join the European Union by January 2007. …
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Foreign Direct Investments in Bulgaria
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Running head: Foreign direct investments in Bulgaria Foreign Direct Investments in Bulgaria Analysis and Conclusions The Republic of Bulgaria is one of the fastest growing developing countries in Europe. A NATO member since 2004, it aims to join the European Union by January 2007. The country's transformation from a communist country to a parliamentary democracy in 1990 attracted foreign direct investments to the country, encouraged by political and economic reforms. However, as the deadline for entry to the EU gets closer, Bulgaria is encountering difficulties due to graft, corruption, organised crime, and bureaucratic inefficiency that threaten to delay the country's admittance but also its efforts to attract more foreign investors. This paper looks at these problems using a strategic analysis framework and proposes a few key solutions that will help the country find clear answers. Analysis of Foreign Direct Investments (FDI) in Bulgaria This paper looks at the investment climate in Bulgaria using the strategic analysis approach used by firms and countries in management decision-making. The investment climate is a country's ability to attract or encourage foreign individuals or corporations to invest or bring in funds that will start or develop an ongoing business (Kotler et al., 1997, p. 189). Foreign investors pay attention to at least four attributes of a country's investment climate: its comparative and competitive advantages, its domestic economic and political stability, property rights protection, and foreign trade zones. Foreign investors will put in money in another country only if the investment climate is attractive, which means that there is a good chance the funds invested will make money and profits, that the government will not give the business difficult problems, and that the country can also benefit from the investment. Examples of FDI are funds to construct public roads and schools, to modernize the country's telecommunications facilities, or to develop energy generation plants. Countries like Bulgaria that want to develop its economy are doing its best to attract foreign businessmen so they will invest. Investors will know the four attributes of a country's investment climate by using a strategic analysis approach, where the country is treated like a business that wants to attract capital from foreign investors for business projects that will result in long-term profits for the investors and give benefits to the country and its people. There are many strategic analysis frameworks to choose from: Porter's Five Forces (1980) or Ansoff's Strategy Matrix (1965) applied to firms, or Porter's Diamond (1990) and Yip's Drivers (2003) used to analyse countries and firms strategically. A simple framework that applies to both firms and countries combines both the SWOT (Andrews, 1971/1987; Ansoff, 1965; Chandler, 1962) and PESTEL (Steiner, 1979; Andrews, 1987) techniques of strategic analysis into what is called the SWOT-PESTEL approach. We will use this to analyse Bulgaria's investment climate. Method of SWOT-PESTEL Analysis SWOT analysis is a review of the country's internal (Strengths and Weaknesses) and external (Opportunities and Threats) environment. PESTEL analysis studies the effects on the country's foreign direct investment environment of six general factors: Political, Economic, Social, Technological, Environmental, and Legal. The strategic analysis combines four SWOT and six PESTEL factors. We will do this by conducting a SWOT analysis of each of the six PESTEL factors based on literature available from our research and summarise our findings on table format, before we conclude with a list of four investment climate attributes as they apply to Bulgaria. This will help foreign investors make decisions, allowing them to compare Bulgaria's investment climate with that of other countries. We begin the paper with a brief write-up on Bulgaria, highlighting important issues the country is currently facing. Then, we proceed with our analysis by identifying the country's political, economic, social, environmental, and legal strengths, weaknesses, opportunities, and threats with respect to attracting foreign direct investments. Brief Overview: Republic of Bulgaria Geography and Demography Bulgaria is a South-eastern European country surrounded by the Black Sea in the east, Turkey and Greece to the south, Romania in the north, and Serbia and Montenegro in the west. The capital of the country is Sofia. Bulgaria's population of 7.4 million is declining at 0.86 percent per year. The country's median age is 40.8 years (CIA, 2006). Economic system The country is instituting reforms to adjust to a free market economy after over forty years of communism. Its economy grew 5.7 percent in 2005, giving it a per capita income at purchasing power parity of $9,000 (U.K.: $30,900). Its economy is made up of services (59.7 percent), industry (30.2 percent), and agriculture (10.1 percent). Macroeconomic recovery starting in 1997 was reinforced by the imposition of a fixed exchange rate of the leva against the German deutschmark and the negotiation of an IMF standby agreement. Low inflation and steady progress on structural reforms has resulted in improvements in the general business environment. Bulgaria has averaged 4 percent growth since 2000 and has begun attracting significant amounts of foreign direct investment. Despite a strong currency that appreciated by 30 percent in five years, Bulgaria has a high unemployment rate (over 11 percent) and is the ninth poorest out of ten eastern European countries applying for the EU, ahead only of Romania (CIA, 2006). Political system A communist country from 1946 to 1990, Bulgaria became a parliamentary democracy after multiparty elections in 1990 and drafting a new constitution in 1991. It joined the North Atlantic Treaty Organisation (NATO) in 2004 and is applying for membership in the European Union (EU) by January 2007 (CIA, 2006). EU membership will help Bulgaria accelerate its economic development, as proven by the experiences of other European countries like Spain, Greece, and Ireland. SWOT-PESTEL Analysis We now consider each of the six strategic analysis factors and study the strengths, weaknesses, opportunities, and threats of each. Political Political Strengths The political situation is relatively stable since 1996. Bulgaria signed the EU accession treaty in April 2005, making its domestic and economic policies driven by the anticipation of joining the EU by early 2007. Government policies continue to focus on commitments to both IMF guidelines and EU entry requirements, whilst regular elections follow the provisions of the 1991 constitution (Heritage, 2006). Bulgaria, as a former monarchy, has as one of its most active politicians a member of the country's royal family, former Prime Minister Simeon Saxe-Coburg-Gotha who lost his position in 2004 but helps provide political stability (DOS, 2006). Tax revenues and government spending increased in 2005 (Heritage, 2006). Political Weaknesses Corruption in the public administration, a weak judiciary, and the presence of organised crime are the biggest challenges (CIA, 2006). Bulgaria must show tangible results against graft and crime if it is to join the European Union as planned by 2007. Otherwise, there will be a one-year delay (Euronews, 2006). Bulgaria has to prove its readiness for EU accession by showing signs of accountability and independence in the judiciary in fighting corruption and show that nobody is above the law. Recent assassinations attributed to criminal motives are being carried out and remain unsolved due to political incompetence (Economist, 2005). Government expenditures are 40.9 percent of the country's GDP. Although the government budget is not deficitary, this figure reflects a fiscal burden that may not be sustainable. If the pattern of government spending continues, political and economic instability will result (Heritage, 2006). Political Opportunities A good turnout in the country's recent democratic elections disposes the people to continue structural reforms in the political and economic systems. The government must take advantage to continue reforms and present an image of political stability. Political Threats The Prime Minister commented that EU entry delays would destabilize political and economic reforms currently being undertaken (Kuwait Times, 2006). Economic Economic Strengths Fast growing: The country's macroeconomic stability and strong growth since 1996 make Bulgaria's economy one of the fastest growing in the region. Despite tensions about the privatisation of certain key industries, the government has progressed significantly with economic reforms (Heritage, 2006). Lower taxes: Bulgaria's top income tax rate is 24 percent, down from 29 percent; it has a flat corporate tax rate of 15 percent, down from the previous 19.5 percent. Competition Policy: 1998 Law on the Protection of Competition (Competition Law), intended to establish and maintain a competitive market, forbids monopolies, restraining agreements, trade restrictive practices, abuse of a dominant market position, and unfair competition, and seeks to promote consumer protection. Law was overhauled in 2003 introducing provisions on the Commission for Protection of Competition (CPC). A company is deemed to have a dominant position if it controls 35 percent or more of the market, and will be prohibited from certain pricing practices, limiting manufacturing development to the detriment of consumers, discriminatory treatment of competing customers, tying contracts to additional and unrelated obligations, and, using economic coercion to cause mergers (DOS, 2006). Low inflation and steady progress on structural reforms: Bulgaria has averaged 4% growth since 2000 and has attracted significant amounts of foreign direct investment. Tourism (a traditionally strong sector) has grown, and real Gross Value Added in communications more than doubled between 1997 and 2002 (EIU, 2004). Bulgaria has a currency board system pegging its lev to the euro. From 1995 to 2004, Bulgaria's weighted average annual rate of inflation was 6.04 percent, up from the 5.53 percent from 1994 to 2003. Inflation went down to 4.5% in 2005. Economic Weaknesses The proportion of services over industry in the GDP reflects more the decline of industry rather than a move towards a modern, service-orientated economy. This hides serious qualitative deficiencies within the services sector of the economy and the high proportion of government services within the total (EIU, 2004). Under communism, Bulgaria's agricultural sector was dominated by the impressive, but to a large extent artificial, development of industry concentrated on sectors - such as steel, heavy chemicals, electronics, information technology (IT) and armaments - that turned out to be ill-suited to competition in a post-communist environment. Along with the loss of protected markets and slow and poorly implemented agricultural reforms economic output declined in the early and mid-1990s. Recovery is slow and partial in industry and almost non-existent in agriculture (EIU, 2004). Economic Opportunities The sizeable volume of capital poured into Bulgaria by the European Bank for Reconstruction and Development (EBRD) and foreign and domestic investors is a significant indicator of perceived potential for economic growth and opportunity. The country has to apply these resources in a manner that will ensure continued economic stability and development far into the future (Oxford, 2005). Improvements in the stock market infrastructure, which includes establishment of an official index (SOFIX) in the Bulgarian Stock Exchange, will encourage investments. New trading instruments (government bonds, corporate bonds, Bulgarian Depositary Receipts, and privatisation through the stock exchange, municipal and mortgage-backedbonds, and Bulgarian Depository Receipts) have been introduced and offer opportunities for business. The banking system has undergone considerable transformation since its virtual collapse in 1996 and continues to mature resulting from the introduction of the currency board and stronger supervision and tighter prudential rules for the banking sector. With the possibility of bailouts eliminated under the currency board, banks have had to focus on sound banking practices (Oxford, 2005). The government finances expenditures by accessing capital markets in a weekly auction of Treasuries (3-, 6- and 12-month maturities).Foreign banks can participate in the treasury market only through a Bulgarian bank or the branch of a foreign bank, which is licensed in Bulgaria (DOS, 2006). Foreign Trade Zones/Free Trade Zones: 1999 Customs Act renamed the six duty-free zones as "free zones." Foreign individuals and corporations and Bulgarian firms with 1.0 percent or more foreign ownership may set up operations in a free zone, giving foreign-owned firms equal or better investment opportunities compared to Bulgarian firms. Six operational "free zones" are located on strategic trade rail, road, and/or water trade routes. All forms of production and trade activities and services may take place in the free zones, and foreign goods delivered for production, storage, processing, or re-export are VAT and duty exempt (DOS, 2006). The economic implications of NATO membership are clearly seen: expanding production capacities, greater level of safety in business strategic planning, easier access to new technologies, opportunities for research and development, expansion to new markets (Oxford, 2005b). The government is developing promising sectors of the economy for foreign investment: energy, tourism, information technology, transportation, telecommunications, and agriculture. Bulgaria provides considerable incentives for job creation (DOS, 2006). The new precautionary Stand-by Arrangement negotiated in July 2004 with the IMF signalled to foreign investors that the Bulgarian government would pursue a responsible economic policy in the run-up to EU membership. Two leading international rating agencies raised Bulgaria's rating to investment grade, reflecting the country's positive economic prospects and prudent fiscal policies (Heritage, 2006). Investment Promotion Act amended in 2004 stipulates equal treatment of foreign and domestic investors. The newly approved investment promotion framework creates conditions for improved administrative services and includes an investment incentive package, encourages implementation of investment projects over a period of up to three years, and explicitly recognizes IP and securities as foreign investments (DOS, 2006). Economic Threats Bank lending has increased rapidly despite the imposition of increasingly severe restrictions for money laundering (EIU, 2004). Increased lending has inflationary effects and threatens higher deficits, increasing chances that the central bank will impose direct controls on banks, harming the banking and financial systems (Heritage, 2006). Bulgaria faces crucial challenges in its transition to EU membership, like pushing its privatisation programmes and deregulation of the energy and public sectors. Also pressing are municipal reform, including the judiciary and strengthening administrative and implementation capacity of public offices. At the same time, improving living standards and further developing the investment climate to foster macroeconomic stability and attract FDI remain priorities (Oxford, 2005). The main threats to Bulgaria's economy are those that result from improper implementation of political and economic reforms, inflationary pressure from banking sector deregulation, and a potential delay in joining the EU (Kuwait Times, 2006). Social Social Strengths The population is highly literate (literacy is 98.6 percent), and the country consists of only three major ethnic groups (84.5 percent Bulgarian, 9.6 percent Turkish, and 4.1 percent Roma), meaning the country has less chances of the ethnic strife that affect other European countries (CIA, 2006). The market determines most wages and prices, but the state controls some prices through state-owned utilities (Heritage, 2006). The government subsidises some sectors of the economy, including health, education, energy, and railroads. Bulgaria maintains a minimum wage (Heritage, 2006). Production and labour costs are low, with a highly educated, well trained, and highly qualified labour available. Bulgaria's working-age population consists of around 4.8 million highly educated and skilled men and women; a high percentage completed some form of secondary, technical, or vocational education. Many Bulgarians have strong backgrounds in engineering, medicine, economics and the sciences. The aptitude of workers and the relative low cost of labour are considerable incentives for foreign companies to invest in Bulgaria (Lalev, 2006). Bulgaria and its capital Sofia offer a cosmopolitan quality of life that is regarded as amongst the highest in Europe, marked by diversity and natural beauty. For years a real effort has been made in order to preserve the country's rich and unspoilt flora and fauna. As a result, Bulgaria is (claimed to be) ecologically one of the purest countries in Europe, with exceptionally clear air and water resources (Lalev, 2006). The cost of living is one of the lowest in Europe. A meal for two, made from organically pure products and including a bottle of nice wine will not cost more than seven or eight Euros (Lalev, 2006). Under the Labour Code, employer-employee relations are regulated by contracts, which may be agreed upon through collective bargaining. The Code addresses worker occupational safety and health issues, establishes a minimum wage (determined by the Council of Ministers), and prevents exploitation of workers, including child labour. The Code clearly delineates employer rights, strengthening management's hand in disciplining the workforce (DOS, 2006). Social Weaknesses Bulgaria is a major European transhipment point for Southwest Asian heroin and, to a lesser degree, South American cocaine for the European market. The country is a limited producer of precursor chemicals. Human trafficking is also a problem (CIA, 2006). Some money laundering of drug-related proceeds takes place through financial institutions (CIA, 2006). Strong labour unions with various agendas exist, such as the Confederation of Independent Trade Unions of Bulgaria or CITUB and the Podkrepa Labour Confederation (Oxford, 2005). Corruption is perceived to be one of the gravest problems in Bulgaria's investment climate, despite the government's numerous advances in laws and legal instruments. Bulgaria ranks 54th amongst 133 states included in Transparency International's (TI) Corruption Index for 2004, the same as in 2003 (CIA, 2006). The established human trafficking, narcotics, and contraband smuggling channels that contribute to corruption have yet to be broken, and serious efforts and political will are needed to carry out needed reforms to address judiciary inefficiencies (CIA, 2006). The Bulgarian public generally holds the police, judiciary, customs officials, and political parties in low regard due to perceived corruption. There have been trials and convictions of enterprise managers, prosecutors, and law enforcement officials for corruption, but judges are immune (DOS, 2006). Social Opportunities There is a high demand for professionals with Western management skills (Oxford, 2006). Bulgarians can improve their quality of life as a result of economic growth and development. The quality of education can be affected in a positive way should the country's accession to the EU proceed as planned. More openness to the rest of Europe will let the good things in Bulgarian life (excellent soccer players, cheese and wine, etc.) influence the rest of the world. During 2002-2003, the Ministry of Labour formed the new "National Institute for Conciliation and Arbitration" (NICA), which developed a framework for collective labour dispute mediation and arbitration. NICA includes representatives from labour, employers, and the Government, as does the roster of mediators and arbitrators. Although NICA-sponsored collective labour dispute resolution has not yet started, a number of the appointed mediators received basic mediation skills training from the U.S. Federal Mediation and Conciliation Service (DOS, 2006). Social Threats Employer tax obligations and benefits (clothing allowance, bonuses, etc.) can add more than 50 percent to the nominal wage. Bulgaria's Constitution recognizes workers' rights to join trade unions and organise.The National Tripartite Cooperation Council (NTCC) provides a forum for dialogue amongst government, management, and trade unions, such as cost-of-living adjustments. The current government has substantially revitalized the Council. Disputes between labour and management can be referred to the courts, but resolution is often subject to delays. Over the last couple of years, the Labour Code has been amended to address labour market rigidities and bring labour legislation into compliance with EU social policy and employment requirements. The amendments to the Code simplify additional work procedures, restrict mandatory leaves, and relax procedures for implementing collective redundancies (DOS, 2006). Collective labour contracts at the sectoral or branch level remain binding for all enterprises of the sector or branch. The minimum annual paid leave is 20 days. Although the Code may be considered a social strength factor, this raises labour costs and, therefore, represents a threat to foreign investments (Oxford, 2005). Technological Technological Strengths Due to the strong education system, there is a base of talented and skilled workers in Bulgaria. Many small and medium sized software companies produce world- class quality software solutions at a cost that are lower compared to the rest of Europe. Local software makers offer quality, flexibility, cultural compatibility, and reliability to Western customers. Establishing production or R&D centres also offers a very attractive value proposition to investors (Lalev, 2006). More than two-thirds of telephone lines are residential and telephone service is available in most villages. A fairly modern digital cable trunk line now connects switching centres in most of the regions; the others are connected by digital microwave radio relays (CIA, 2006). Usage of Internet (8% of population in 2002) and mobile phones (64 percent of population in 2005) is growing fast (CIA, 2006). Technological Weaknesses Technological infrastructure is extensive but antiquated (CIA, 2006). Technological Opportunities Modernisation of power generation, telecommunications, transport, construction, and mass media sectors will result from economic and political reforms being carried out. Technological education infrastructure can be upgraded and reformed once integration with the rest of Europe is achieved. Technological Threats Inability of the present government to carry out reforms will threaten the political and economic development of the country, slowing down technology investments. Environmental Environmental Strengths Bulgaria's strategic location on the European continent allows investors to reach the entire market of the European Union and the markets of central and Eastern Europe, which represent a total population of 853 million (CIA, 2006). Its natural boundary with the Black Sea gives it easy access to the rest of Eastern Europe and northwest Asia. Minerals, including coal, copper, and zinc plays an important role in industry. Environmental Weaknesses Decades of communist rule produced dangerous levels of air pollution from industrial emissions. Rivers are polluted from raw sewage, heavy metals, and detergents. Widespread deforestation, forest damage from air pollution and resulting acid rain, soil contamination from heavy metals from metallurgical plants and industrial wastes are problems that can be solved (CIA, 2006). The country is mostly mountains with lowlands in the north and southeast, and is prone to earthquakes and landslides (CIA, 2006). Environmental Opportunities The people are becoming more conscious of environmental protection. EU membership is pushing the country to conform to higher standards. There are encouraging projects to finance the decommissioning of unsafe nuclear plants (Kozloduy), acquire equity stakes in two electricity distribution companies, and rehabilitate several thermal power plants (DOS, 2006). Environmental Threats Poor implementation of environmental laws due to graft and corruption is a threat. Legal Legal Strengths Bulgaria's 1991 constitution encourages and supports foreign direct investments, a market economy, and the promotion of private enterprise and ownership. Government has legislative and judiciary branches that are, in principle, functionally independent but, in reality, need more experience to do what they should (DOS, 2006). The country's civil law and criminal law are based on Roman law, and accepts compulsory International Court of Justice jurisdiction. Low legal barriers to foreign investment: foreign exchange, foreign ownership of land, and foreign-owned firms (DOS, 2006). Bulgaria is a member of the World Intellectual Property Organization (WIPO) and a signatory to key international agreements (DOS, 2006). Legal Weaknesses Too many licensing and regulatory requirements, combined with arbitrary interpretation and enforcement by the bureaucracy, creates incentives for corruption, which has long been seen as an impediment to investment (DOS, 2006). Notwithstanding a dramatic increase in the foreign ownership of land, the legal system remains largely ineffective, allowing organized crime and corruption to hamper investments (Heritage, 2006). According to the World Bank, Bulgaria has several non-tariff barriers like customs regulations and policies that are characterised as "cumbersome, arbitrary and inconsistent." The most common problems are "excessive documentation requirements, slow processing of shipments, and corruption" (DOS, 2006). Problems most encountered by foreign investors in Bulgaria are: government bureaucracy; poor infrastructure; frequent changes in the legal framework; low domestic purchasing power; a privatisation process characterised by delays and indecisiveness; and corruption (DOS, 2006). A weak judicial system limits investor confidence in the ability of courts to enforce ownership and shareholders rights, contracts, and intellectual property rights. Petty corruption is a problem for foreign companies operating in Bulgaria, and attempts to make judges more accountable are hampered by the protection afforded to senior members of the judiciary under the constitution. Corruption in the judiciary remains a serious problem (EIU, 2004). The law does not specifically restrict hiring of expatriate personnel, but residence permits are often difficult to obtain (Heritage, 2006). Legal Opportunities Although necessary legal changes are unlikely until the next parliamentary elections, the new parliament will face greater pressure from the EU to proceed more vigorously with legal reforms (Heritage, 2006). 2003 Law on Special Purpose Investment Companies allows public investment companies (SPIC) in real estate and receivables. Since a SPIC is considered a pass-through structure, at least 90 percent of its net income must be distributed to shareholders who are taxed on the dividends received. Prospective investors should consult their legal counsel for updated information and due diligence before any obligations (DOS, 2006). The InvestBulgaria Agency (IBA) (www.investbg.government.bg), the government's coordinating body for investment, provides information services, individual administrative services and assessment of qualification to receive incentives. In 2003, Parliament passed the Restriction of Administrative Regulation and Control of Economic Activity Act, which establish a general and systematised set of rules for simplifying and implementing administrative regulations. The Act sets forth firm market principles of regulation, requiresthat the regulating authority take account of the compliance costs to be borne bybusiness and that no national level law can be passed without an impact analysis on thelaw's economic effects ontheregulated activity, and eliminates bureaucratic discretion in granting applications for routine economic activities, providing for "silent consent" when the government has not acted upon an application in the allotted time. All these reforms considerably lighten the potential of regulatory abuse at all levels of government and when implemented should improve the overall business environment. From the perspective of regulatory relief, this is a milestone (DOS, 2006). Legal Threats In practice, the protection of property rights is subject to difficulties of varying degrees. Although Bulgarian Intellectual Property Rights (IPR) legislation is generally adequate, with modern patent and copyright laws and criminal penalties for copyright infringement, industry representatives believe effective IPR protection requires improvements to the legislation, including to the Penal Code, the Penal Procedure Code and the Decree on the Border Measures for Protection of IPR. Additionally, the government lacks sufficient institutional capacity, coordination, and will to address effectively major enforcement problems, especially in combating and prosecuting organised crime groups. Many industrial groups currently have intellectual property disputes before the government. In May 2004, Bulgaria was placed on the Special 301 Watch List for the first time in five years. There has been a steady resurgence of piracy, mainly in the sale of pirated optical disc media (DOS, 2006). The government policy for promotion of investment is not applicable to banks and other financial institutions, insurance companies, investment companies, companies with special investment purposes, pension and health insurance companies, gambling companies, or investments made pursuant to the Privatisation Law (DOS, 2006). Foreign investors have asserted that widespread tax evasion, combined with the failure of the authorities to enforce collection from large state-owned companies, places them at a disadvantage. Another problem underscored by investors is the frequent revision of tax laws, sometimes without sufficient notice.The government is improving tax collection and limiting tax arrears of state-owned enterprises and also indicated their long-term intention to lower marginal rates as tax collection improves (DOS, 2006). Summary Analysis of Bulgaria on the Attributes of FDI Comparative and Competitive Advantages Bulgaria's investment attractiveness lies in its geographical location between the booming economies of Asia and Europe, its natural resources, the abundance of skilled and educated labour, and the existence of a basic business infrastructure. Its location compensates for low domestic demand due to the small population because producers have immediate access to hundreds of millions of people on both sides. The country has a vibrant private sector adjusting to the competitive demands of a free market, which can be an opportunity for low-cost suppliers and at the same time a medium-term threat for potential competitors. Investors can get in early and take advantage of the situation prior to developing it as a base to access new markets in the developing countries of the EU. The lack of managers familiar with the western way of doing business is a disadvantage for foreign investors, but it presents an opportunity to train a new breed of Bulgarian managers who are familiar with the needs of the local markets and who can be hired and developed at a much lower price. Domestic Economic and Political Stability The main problems of Bulgaria are common to almost all developing countries: graft and corruption, a regulatory regime that is characterised by having many laws and rules to cover every loophole, but where implementation due to lack of experience in the rule of law is a big problem. Changes in existing laws, loose implementation and enforcement, and the lack of credibility of (and lack of respect for) the public sector is a problem, but it is not something that cannot be solved with time. Compared to other developing countries, Bulgaria is stable, and government efforts to implement economic and political reforms are ongoing. Under the threat of a delay in its accession to the EU unless clear accomplishments can be shown, the government is expected to strengthen and support all ongoing reform measures. Kotler et al. (1997, 190) identify two types of risks for investors: political (asset protection/investment recovery) and economic (operational profitability/cash-flow) risk. The first refers to the threat that government will destroy, expropriate, or limit the transfer of invested resources, whilst the second arises from economic downturns, currency depreciation, labour problems, and the formation of monopoly power of firms. Based on our analysis of Bulgaria, many foreign investors especially those with years of experience confronting similar risks in other developing countries would find its political and economic risks manageable and would not be discouraged by problems. Property Rights Protection Bulgaria has legislation in place that guarantees protection of property rights, both real (land) and intellectual (trademarks). The only problem is implementation of these laws in the area of intellectual property. Its 2004 inclusion in the Special 301 list show that there are problems, but these can be addressed and solved in due time. There are no known recent cases of government expropriation of the properties of foreign investors, so we can say that Bulgaria offers adequate protection on this point. Foreign Trade Zones Bulgaria has created Duty-free Zones where foreign and local companies can find it attractive to do business. These free trade zones provide benefits to Bulgaria through job creation, improved skills in its labour force, technology transfer, and increased income for its people. The strategic location of these zones, the incentives they offer, and the availability of a skilled and educated workforce are helping Bulgaria bring in more FDI to take advantage of these benefits being offered. Conclusions and Recommendations Bulgaria has done much to attract foreign investors. If it succeeds becoming a member of the EU by 2007, it will begin a path to growth that will surely benefit its people and the region. However, it has several other competitors, developing European countries that are also aiming for EU membership. The recent warning it received from the EU about the need to be more aggressive in pushing reforms, especially in the judiciary, is a message that its government cannot disregard. In the last fifteen years, Bulgaria's government and its people have shown that it can reform itself. The warning should give the government the political will it needs to get tough on crime and to cut down the bureaucracy, graft, and corruption. 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Retrieved 12 April 2006, from http://www.heritage.org/research/features/index/country.cfmid=Bulgaria Kotler, P., Jatusripitak, S., and Maesincee, S. (1997). The marketing of nations: a strategic approach to building national wealth. New York: Free Press. Kuwait Times (2006). Bulgaria hits back at EU. 18 April 2006. Retrieved 18 April 2006, from http://www.kuwaittimes.net//international.aspdismode=article&artid=1309635625 Lalev, V. (2006). Invest Bulgaria: the preferred partner of investors seeking opportunities in Bulgaria. Retrieved 18 April 2006, from http://www.investbulgaria.com/advantages.htm Oxford Business Group (2005). Banking on Bulgaria. INVbg Website. Retrieved 18 April 2006, from http://www.invbg.com/emerging_bulgaria_oxford_business_group.htm Oxford Business Group (2005b). NATO membership: trade and investment opportunities in south-east Europe. INVbg Website. Retrieved 18 April 2006, from http://www.invbg.com/opportunities.htm Porter M.E. (1980). Competitive strategy: techniques for analysing industries and competitors. New York: Free Press. Porter, M.E. (1990). The competitive advantage of nations. New York: Free Press. Steiner G.A. (1979). Strategic planning: what every manager must know. New York: Free Press. Yip, G. S. (2003). Total global strategy II. New Jersey: Prentice-Hall. Table 1 SWOT-PESTEL Analysis of Bulgaria as a Site for Foreign Direct Investments Strengths Weaknesses Opportunities Threats Political Stable political system 1991 Constitution NATO member since 2004 EU membership in 2007 Corruption in judiciary and public administration Rising government expenses High democratic participation of the people EU acceptance delays can destabilise the country and stop reforms Economic Fast economic growth Low tax rates Investment incentives Competition Policy Low inflation Poor industry growth masking size of service sector Agricultural sector is backward Adjusting from forty years of communism Investments from EBRD and EU Stock market investors Banking system reforms Financing government spending Many investment opportunities Overheating banking system threaten Central Bank action Poor implementation of laws and regulations Crime out-of-control Social Highly literate population Market-driven labour sector Low labour and costs Cosmopolitan lifestyle Good quality of life Labour Code provisions protect both workers and employers Declining population growth Drug transport site Human trafficking Corruption as a social disease Poor public perception of police, law enforcement, judiciary, and public officials High demand for Western-educated professionals, especially managers Quality of life and education can improve with EU membership Labour arbitration opportunity Too many tax and benefits for workers can drive up cost of doing business Trade union power can grow and disturb industrial peace Court resolution delays of labour cases Technological Good education results in wide base of technology workers Telephone lines widely available, being upgraded to digital switching systems Growing use of Internet and mobile phones Technological infrastructure is extensive but antiquated Modernisation of telecoms, power generation, construction, transport, and mass media provide opportunities for new businesses Technology education can be improved with EU integration Delays in reforms will slow down entry of Bulgaria to digital age Slowdown in technology investments due to graft and corruption and EU entry delay Environmental Good strategic location provides access to large markets Natural resources make mining an important industry sector Natural boundary with Black Sea Neglect during communist rule damaged the environment Mountainous terrain make it susceptible to earthquakes and landslides Growing environmental awareness amongst the people EU membership will subject the country to higher standards Decommissioning of unsafe nuclear power plants and dirty thermal plants Poor implementation of laws due to graft and corruption Legal Pro-investor legislation and constitution Rule of law based on common internationally accepted ground Low legal barriers to investors Intention to protect intellectual property rights Graft and corruption Too many regulations that are poorly implemented Bureaucracy Changes in tax laws without consultation Residence permits delayed Increased pressure from EU for more legal reforms Special Purpose Investment Corporation: to own land and receivables 2003 Economic Activity Act will decrease abuses and red tape Actual problems in IPR law implementation: more reforms needed in Penal Code, etc. Lack of experience/consistency in implementing laws Tax evasion and piracy (Sources: CIA, 2006; DOS, 2006; Euronews, 2006; Heritage, 2006; Lalev, 2006; Economist, 2005; Oxford, 2005; EIU, 2004) Read More
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