Dynamics and Opportunities for Korean Businesses in Bulgaria

FDI in Bulgaria: Dynamics and Opportunities for Korean Businesses Assoc. Prof. Dr. Daniela Bobeva Economic Research Institute at BAS

Outline IER priorities and experience in foreign investment research and foreign trade What we do and we do not know about foreign investment to/in Bulgaria Bulgaria-Korea economic relations: why researchers have to help

FDI research: Hitting a moving target Research on foreign investment has always been a priority in IER strategy and programmes since early 90-ies Early 90ies: opening for FDI as a pillar of market economy emergence and a key instrument in the transition reform agenda Mid 90-ies: privatisation and the role of FDI On the road to the EU membership: convergence and EU markets: FDI as an instrument of EU integration and a tool for strengthening the single EU market; Crisis and FDI: FDI and exit from the recession; more research focus on the FDI companies; targeting new FDI source countries

Relocation of Western companies in Bulgaria FDI and intercompany relations after the EU accession (Professor Goev, Associate professor Minchev (2009-2011): Studying 100 foreign investment companies in Bulgaria compared with the same data from 2001. Assessing the relations between the Bulgarian and foreign companies.

Promoting competitiveness of Joint ventures in Bulgaria Dr. Marangozov . The study focuses on competitiveness and Joint ventures in the context of local and European practices and legislation.

Structuring Balance of Payments Prof. Minasian : The study results in a comprehensive set of policy measures to improve macroeconomic policies and synergies between different polices that serve for macroeconomic and financial stability and balancing externalities.

FDI in Central and Eastern Europe Professor Balkanska: A comprehensive analysis of specific factors that drive FDI in CEECs and particularly in Bulgaria. The most attractive sectors are Identified, as well the important sectors that lack foreign investment are presented. The research proves that the economic growth is strongly dependant on the FDI flow in Bulgaria due to the high level of openness of Bulgarian economy. Key policy measures are offered. Foreign Direct Investments In Bulgaria: Do They Have An Effect On The Economic Development of The Country? Christova-Balkanska, I., 2009, N 1, p. 197- 218. ISSN: 0205-3292

Intensity of FDI 35 30 25 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -5

Striking facts about FDI in Bulgaria Bulgaria and Estonia are leading in the EU as per the intensity of FDI inflow in last 12 years FDI inflow 41,279 m euro 1998-2013 FDI stock 38,331 m euro 2013. But unfavourable sector distribution Bulgaria is the only EU country in the top ten in the world for outsourcing Bulgaria offers large advantages for FDI: lowest tax level, no currency risk, lowest labour costs in EU, but In 2013 Bulgaria is among the 3 hot spot for start-ups in Europe for 2013 The BG economy is hospitable and demonstrates a large absorption capacity for FDI Large opportunities in several sectors - industry, natural resources, agribusiness . Growing outsourcing is this always linked with FDI These advantages drive low skills, labour intensive productions. Insufficient investment in innovation . Last place in EU according to the innovative FDI Start-up and innovation a priority for FDI

Similar FDI challenges in both countries Korea received USD 98 bn FDI in 2013 Insufficient FDI in value added sectors Low contribution FDI companies in the exports (Korea 20%, Bulgaria 17%) FDI companies engage only 6% of labour force in Korea and 14% In Bulgaria. Common strategies to rely on FDI for acceleration of the economic growth Decreasing inflow from deteriorating euro area economies need to be compensated. Where from?

Asian economies as a source of FDI ? Traditionally Japan was considered as a country that largely invests aboard but the last two decades put on the stage other Asian countries China and Republic of Korea invest abroad more than received inflow India, Pakistan and Vietnam FDI inflow is still larger than the outflow but the FDI is growing. Their current account deficits are largely covered by the FDI inflow Internationalisation of fast growing Asian economies takes time. Realistically, FDI from R Korea, China and Japan could be encouraged in a short

Asian FDI in Bulgaria FDI stock from China, R Korea, Japan, Vietnam and India represent only 1% of total FDI stock in Bulgaria (2013) R Korea is leading FDI investor in Bulgaria among the five Asian countries The crisis impacted negatively the FDI inflow from the Asian economies

FDI stock in Bulgaria from Asian countries in 2013 (m euro) India China Japan R Korea Vietnam 0% 3% 26% 44% 27%

Direct investment inflow from Korea to Bulgaria 40 35 30 25 20 15 10 5 0 -5 -10 -15

DI outflow from Korea to CEECs 600 500 400 Slovakia 300 Poland Hungary Czech R. 200 Bulgaria 100 0 2004 2006 2007 2008 2009 2010 2011 2012 -100

FDI inflow in Bulgaria from R Korea Only 250 m euro inflow FDI for the last 18 years followed by China 205 m euro Disproportionately small inflow in Bulgaria as compared to the other CEECs Very unstable inflow Incidents of disinvestment (three years) Only large multinational companies involved In general, less Korean presence in smaller economies . Largest FDI to large OECD countries. Negligible Bulgarian FDI inflow in Korea (USD 600 thousand in 2014)

Success versus unsuccessful stories Unsuccessful stories: LB Bulgaricum, Photovoltaic investment, etc. too many mistakes! Failures lead to a higher risk perceived. Resolving the trouble cases as a toll for encourage further investment Good cases?

Similar policies in FDI promotion Improvement of FDI environment cutting the administrative burden; increasing predictability Appropriate infrastructure Incentives for investment in value added sectors; creation of R&D centres. Concessions for job creating investment Promoting value chain investment

How to boost FDI More research on synergies between both economies is needed for the purpose of identification of demand/supply potential and diversification of FDI inflows Field work is needed to clarify the success and failed investments and learn the lessons Involvement of SMEs in internationalisation seems a common problem. How to encourage SMEs cooperation? Innovation cooperation needs innovation How better benefiting from the Free Trade Agreement? Financing FDI - instruments , risk mitigation

Total bilateral trade RB and RK (m USD) 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014

R Bulgaria: Export to/Import from R Korea 250 200 150 Export Import 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014

Bilateral trade Trade between the two countries substantially increased in the last decade and more pronounced after 2006 The trend has been volatile since 2007 which is associated with both export and import dynamics The recent financial and economic crises impacted strongly the export and at much lesser extend the import from Korea The EU Korea Trade agreement has a little impact on bilateral economic relations The export of Bulgarian goods is caching up with the import from R Korea and the trade between the two countries converge to achieve a balance Prices of metals strongly impact the total trade between the countries

Favourable legal framework The Free Trade Agreement between EU and R Korea signed on July 1, 2011 is the first with an Asian country which is expected to boost bilateral trade. But it does not happen automatically. The agreement creates only opportunities. The information is needed to be spread among participants and also discussions aiming at mutual understanding should take place

Institutional framework in place Sofia Office of Korean Agency for Export and Investment Promotion / ( ) contributes to bilateral relations In 1990 Bulgaria- Korea Committee for Economic Cooperation

Challenges Still bilateral trade is below the potential Overconcentration of bilateral trade in few goods: over 80% of export to R Korea are metals and 40% of import are diodes and chemicals Non tariff restrictions Transportation costs Financing tools

How to increase bilateral trade More research on absolute and competitive advantages of both economies and their synergies and complementarities Trade of foodstuffs and machines create larger opportunities . More cooperation between food control authorities Removal of remaining barriers Trade finance instruments need to be employed. More active support from financial institutions. Transportation and other costs of trade to be reduced More stronger and targeted support to excporters from both countries More trade will encourage more investment

Way foreword Current trade and economic relations offer many challenges from researchers point of view Although favourable legal and institutional framework is in place bilateral relations need further boosting Identifying main areas with high potential for bilateral trade and FDI Studding the obstacles, extend best practices

Thank you ! Thank you ! Let s answer the questions together Let s answer the questions together