Determinants of foreign direct investment in Bulgaria

By the end of 2007, two more countries, Bulgaria and Romania, are now confidently expected to become full members of the European Union (EU). This further extension of the Union into southeastern Europe represents a consolidation of the integration process in the region and lays the foundations for future enlargement to, firstly, Croatia, and then the rest of thewestern Balkans. The internal economic and political development of these latter countries is now anchored in the prospect of EUmembership and there is a real sense in which we can observe the ‘political conditionality’ imposed by Brussels acting as a magnet for democratic reform processes in the region. Bulgaria and Romania have acted as rolemodels and the fragility of their reformprocesses offers both an inspiration and a warning to the rest of the region in its bid to integrate itself more closely to the EU. The warning lies in the fact that the Commission can still delay Romanian or Bulgarian accession if the momentum falters or fades, and the inspiration lies in the encouragement and flexibility displayed by Brussels towards these two applicants. Even after they join, much will depend on how their economies and political systems actually adapt to the challenges of the single market. While it may be true that membership will itself solve some of the problems that remain, this cannot be taken for granted. In particular, the competitiveness of these two economies will be rigorously tested as much by other Central and East European member states as by the more well-established but high-cost economies of western Europe. In this context, the ability of Bulgaria and Romania to attract foreign direct investment (FDI) will be the real litmus test of their integration into EU25. The capacity of any economy to absorb FDI reflects a broad spectrum of political and economic attributes: infrastructure, skill levels in the workforce, the banking system, administrative and legal systems, and an atmosphere of political ‘trust’ between donor and recipient countries. Bearing such hypotheses in mind, this paper explores the specific factors that have inhibited FDI in Bulgaria in recent years; and assesses the implications for Bulgarian membership of the EU. We do this in the belief that any country’s propensity to attract FDI is reflective of its broader acceptance of the norms and values that guide externally sourced investment decisions. This aspect of Bulgaria’s relationship with the EU has been relatively neglected in the academic