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Destination Bulgaria

Date: 15.04.2010

By Nadia Damon in Sofia

It may have dropped off the foreign investor's radar as the global downturn took hold, but Bulgaria has been placed firmly back in the ones to watch category with the news that 54 % of respondents polled by consultancy firm Ernst & Young's in its latest survey on foreign direct investment (FDI) remained optimistic that within the next three years Bulgaria would be seen as a prime place to do business.

Next to figures released by Bulgaria's National Bank, which revealed that FDI levels in January amounted to just ?52.9 m (0.2 % of the GDP) compared with the ?391.7m (1.2 % of GDP) for the same month in 2009, such research may seem a little too optimistic. But Ernst & Young insists its 2010 report is built on solid foundations – in the form of 203 interviews with business leaders from multinational companies that were conducted at the end of 2009. "South-Central Europe is perceived as the next European frontier and as a growing market for the investors in the midterm," Fabrice Reynaud, the senior manager at Ernst & Young who headed up the research, tells bne. "In this region, Bulgaria is seen as the country the most likely to improve its attractiveness. For an investor, image and perception come before the economic reality of the country."

Within Southeast Europe, Bulgaria currently ranks third in terms of attractiveness after Croatia (40 %) and Romania (39 %) and ahead of Serbia (33 %) – one place adrift of its actual status, according to the consultancy firm. In terms of existing FDI projects in the South-Central Europe region, it puts Bulgaria second with 23 %, Romania first (49 %) and Serbia third (13 %). Germany is the country's leading investor, closely followed by the US.

Unsurprisingly, the survey's optimism was accompanied by the usual caveats, with interviewees identifying the need for Bulgaria to eradicate corruption and bureaucracy (30 %), make improvements to the communication infrastructure (21 %), achieve political stability (14 %) and implement more flexible administrative procedures (14 %) if it is to live up to its true potential. "These are not short-term measures," Reynaud concedes, "but they need to be addressed in the midterm. When you look back at the economic development of previous waves of accession, the results are very encouraging – take Spain and Portugal, for example."

Paulius Kuncinas, regional editor for Bulgaria at Oxford Business Group, agrees. "Bulgaria needs to improve its infrastructure and business environment to unleash productivity gains," he says. "In addition to the measures already cited in the report as being necessary in terms of securing Bulgaria's future attractiveness, I would also put the emphasis on closer transport and energy integration within the rest of the region and diversification away from tourism and real estate as sources of growth. The changes this survey calls for are already in the works, although it has to be said that the crisis has brought added strain and is delaying the process, but I agree that three years should be enough to complete the transformation if the political will is there."

These very real image problems mean that the country needs to improve its marketing and promotion efforts to enable the real value of "Destination Bulgaria" to be discovered, says Reynaud.

"Companies target Eastern Europe first and then go at a country level – which is why it is very important to have a good image, and thus to be included in the preliminary shortlist of countries that investors make up before they go and view the market for themselves. If the country is not in the top of mind of investors based in London, Los Angeles or Mumbai, then it is very difficult to be among the final countries visited by the investor, at least for greenfield investments."

Future gains

According to Ernst & Young's findings, FDI is closely aligned with the EU's own country-specific strategy, with transport and telecommunications infrastructure (49 %), labour skills levels (34 %), administrative efficiency (22 %), R&D environment and innovation (17 %), and business parks (16 %) being cited as the most important investments to make in Bulgaria – as these qualify for EU funds. Reynaud adds that soft investments – such as education, universities, clusters and R&D centres – are also required to steer Bulgaria towards being more of a knowledge-based economy.

Outsourcing is seen by the report as an established area in Bulgaria with particularly strong potential for growth. "There are two outsourcing sectors – one for industrial activities, the other for sales and marketing functions," Reynaud explains. "Both operations are subject to strong cost competition, precisely where Bulgaria has good assets to showcase. At the same time, the country is shifting towards more added value, and on top of its industrial and logistical investments, will manage to attract more and more service sector activities – such as call centres, shared service centres, regional headquarters and R&D centres." To date, only tier-1 international companies that have embarked on the change and reorganised their business functions around shared service centres, says Reynaud. He claims tiers 2 and 3 will follow in the next decade.

Bulgaria already occupies the top spot for call centres in Southeast-Central Europe, according to Ernst & Young's data, and is seen by respondents as being number two to Croatia as a potential hub for logistics. For Reynaud, Bulgaria's strengths in terms of its competitive costs, labour and language skills, and relatively good international accessibility make it well-placed to harness the trend towards shared service centres, however, he points out that the country's high levels of bureaucracy, as-yet-undeveloped strategies for its second cities and the alphabet are weaknesses that will require attention in the coming years.

Oxford Business Group's Kuncinas says Bulgaria stands to make a higher contribution regionally in terms of so-called nearshoring – the outsourcing of back-office functions from the EU markets in IT business services. "But the country needs to market itself more actively in this area. At present, it is still in the early stages of development. The challenge here will come in the form of language skills as well as a good understanding of business processes," he says.

Business New Europe

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