The role of risk as an FDI barrier to entry during transition: the case of Bulgaria.

Author:Bitzenis, Aristidis
Position:Foreign direct investment - Survey

Survey studies present a valuable opportunity to contribute to economic research and are consistent with the methodology of institutional economics; particularly, surveys assist in understanding economic behavior that is often buried in a deeper context. In this tradition, a questionnaire was designed to extract valuable information regarding the determinants of foreign direct investment (FDI) in Bulgaria during the post-communist decade of the 1990s and especially after 1997. The policies introduced in 1997 proved to be the cornerstone of macroeconomic developments in Bulgaria which improved the business environment leading to the entrance to the European Union (EU) in 2007. The purpose of the survey was to discover the type of entry barriers for inward foreign direct investment considered by foreign multinationals (MNEs) in the late 1990s, in order to determine whether they should ultimately pursue an investment in Bulgaria. We surveyed established multinationals in Bulgaria to discover the perception of these existing MNEs regarding the business environment because these foreign companies have better knowledge of the business environment in the country where they are operating. These multinationals had to determine whether the business environment was risky or not as they would have to cope with the environment, and if they choose to undertake the risk to find ways to overcome this barrier.

Our sample was drawn from the 131 largest foreign investors in Bulgaria. Of these, 64 responded, for an overall response rate of 48.9%. From the results of the survey, 52% of the total number of foreign investors that responded stated that their investment in Bulgaria is of high risk. This paper investigates the level of importance multinationals place on the high risk environment in Bulgaria as a barrier to FDI. To this end, we address whether the high risk environment in Bulgaria has been affected by the foreign entry mode, the prior trade relations, the invested amount, the sector that the multinational operates, and finally, the origin of the MNE. Policy makers and students of both transition economies and international development would benefit from this novel approach, based on the questionnaire data, in determining the level of importance of the risk environment in Bulgaria for MNEs and consequently developing a more accurate policy response with the goal of further stimulating FDI in the country. The paper is structured as follows: the next section presents the survey design; it is followed by the results and analysis; and the paper concludes by providing the policy implications of our survey.

Survey Design

A questionnaire was designed to extract information regarding the determinants of FDI in Bulgaria during the post-communist decade of the 1990s. Its purpose was to identify the type of entry barriers for inward foreign direct investment considered by foreign MNEs in order to establish whether or not they should make an investment in Bulgaria. With the help of the official document from the Bulgarian Foreign Investment Agency (BFIA), a list of 110 foreign companies was created that according to the BFIA had invested over US$1 million in Bulgaria by the middle of June 1998. For the purpose of our survey, we extended the list to 131 by adding another 21 investors who were not part of the official BFIA list. As of 2007, these companies still remain among the top 150 biggest foreign investors in Bulgaria (InvestBulgaria Agency 2007).

Our sample was formed by the 64 companies of the 131 investors that responded (64/131=48.9%), an extremely high response rate. Moreover, because the sample was comprised of companies that had invested a very large amount of funds based on the economic figures provided by BFIA, it proved to be very representative. The volume invested by the 131 companies comprised 70% of the total foreign capital invested in Bulgaria. The total FDI inflows in Bulgaria were US$1.7 billion in mid 1998. The total amount invested by the 110 foreign companies from the BFIA catalogue was US$1,283,419,173. The 21 enterprises that we added contributed an additional US$47.6 million. The sample of the 64 companies represents a total investment amount equal to US$863 million, which is 64.7% of the total investments of the 131 companies or 50.7% of the total Bulgarian FDI inflows (BFIA catalogue, Foreign Direct Investments over US$1 million, as of June 30, 1998). For the latest data for FDI inflows in Bulgaria see Table 1. Note that since Bulgaria has joined the EU, all the calculations are in Euros.

The questionnaire was originally based on the authors' knowledge of the ample literature regarding FDI theories...

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