tipska

Biljana Stankov1, Jasmina Markov2, Ivana Milošević3
1 Higher School of Professional Business Studies in Novi Sad, Serbia

2 Faculty of Economics in Subotica, Serbia
3 Faculty of Economics and Engineering Management in Novi Sad, Serbia

Management 2015/77

FDI by Economic Activities and Investment
Incentives in Bulgaria and Serbia
UDC: 339.727.22(497.11)

330.341.2
DOI: 10.7595/management.fon.2015.0026

1. Introduction

A long time ago, the United Nations took the view that FDI are such investments that involve agreement of part-
ners, providing long term interests and implementation of control by the company from one country over the com-
pany which is a resident of another country. In this way, the company that invests acquires ownership control over
the company into which it invests its capital, and which is located in another country outside of its homeland. Es-
pecially in recent decades, FDIs have become a very attractive form of investing funds, since they provide multi-
ple benefits for both investors and host countries. The experiences of a large number of transition countries, such
as Bulgaria and Serbia, have shown that FDIs are a more favourable form of inflow of necessary accumulation,
compared to conventional loans in the international financial market. The direct inflow of foreign capital improves
their economic situation, encourages economic activities, increases employment and productivity, increases ex-
ports and stimulates economic recovery. FDI should accelerate the process of economic and political transfor-
mation and, as Kragulj (2003) emphasizes, should be a promoter of economic growth and development in
countries in transition. However, the real facts cannot be ignored because they show that FDI often cause uncon-
trolled exploitation of domestic, especially non-renewable resources, influence the growth of unemployment and
the creation of technological dependence on foreign companies and sometimes form a model of consumption that
generally does not correspond to the level of development of the host country. Countries in transition have occa-
sionally expressed serious dissatisfaction with the economic, social and political impacts of FDI (Vojinović Jaći-
mović, 2002). It is important to properly assess whether a certain investment will have more beneficial rather than
harmful effects, and to make the final decision on that ground. Even so, the above mentioned is a privilege that is
available to developed countries, because poorly developed countries in transition, in pursuit of intense economic
growth, often accept all foreign investors without taking into account the coming consequences. The predominantly
low level of domestic accumulation of capital and the pursuit of dynamic economic growth and development of
the economy cause the need for intensification of FDI inflows. Alfaro, Chanda, Kalemli-Ozcan & Sayek (2004) no-
ticed that the past decade was marked by the increasing role of FDI in total capital flows. In 1998, FDI accounted
for more than half of all private capital flows to developing countries. After initial skepticism, as Grandov, Mitić &

Since 2007, when Bulgaria became a full member of the EU and 2012, when Serbia was granted the status of
candidate for EU membership, these countries have become very attractive investment destinations. The ob-
ject of this research is the movements of FDI in the mentioned countries in 2013 and their structure by eco-
nomic activities. The scientific problem is related to the positive effects of FDI on the host country, making an
attractive investment environment, creating incentives for foreign investors and comparing the structure of FDI
in Bulgaria and Serbia with simultaneous comparison with the European average. It may be noted that this is
a current theoretical and empirical research that deals with modern state of the subject. The necessary quan-
titative data have been collected using the desk method and using the secondary data source and the method
of description as well as the comparative method were used in the ensuing analysis. The aim of the study is
to, by applying the above methods, determine the most attractive investment areas, analyze the current in-
vestment incentives and provide recommendations on adjustments to be made to improve the actual invest-
ment strategies and create attractive investment locations in Bulgaria and Serbia

Keywords: FDI, Economic activities, Investors, Investment destination, Investment incentives, Investment
location

Vojvodić (2011) found that in the mid-nineties, transient European countries began to compete mutually by cre-
ating a more desirable investment ambience in order to attract greater amounts of FDI. According to Cheng & Kwan
(2000) many countries see attracting FDI as an important element in their strategy for economic development be-
cause FDI is widely regarded as an amalgamation of capital, technology, marketing and management. They em-
phasized that an important question for policy makers was what the factors that attract FDI are.

In order to attract foreign investors Bulgaria and Serbia must establish political stability, implement fair
processes of privatization, and minimize commercial risk. Some of the incentives which they apply in attract-
ing foreign investors are friendly laws on FDI, reduction of corporate profit tax, elimination of trade barriers and
investment prohibitions, financial incentives, low rates of VAT and income tax, low costs of hiring and firing em-
ployees and many others. More intensive investments in the Balkan countries started in 2000 and FDI inflows
have been growing continuously since, but has in recent years been under a threat due to economic and fi-
nancial instability in the world. The above said has been confirmed by Penev & Marušić (2011) who found that,
after the period of intensive growth of the inflow of FDI, in 2008, all countries of the region experienced a de-
crease in direct investments, primarily due to the impact of global economic crisis. Already in 2009, the inputs
of FDI in Bulgaria dropped by more than US$ 6000 million, and in Serbia by nearly US$ 1000 million, compared
to the trends in the preceding year. In 2012, these countries were referred to as very interesting investment des-
tinations, leading among the SEE countries by attracting production-oriented FDI and job creating.

According to Ernst & Young’s (EYs) Attractiveness Survey (2013), by the realization of 78 investment projects
along with securing 10302 new jobs in 2012, Serbia placed itself among the top ten European investment des-
tinations by job creation. In the same year, in Bulgaria, foreign investors encouraged hiring of 4379 new work-
ers, mainly in manufacturing.the following year, even 12179 new jobs were secured in Serbia as a result of
the FDI inflows, which accounted for 7% of all new jobs created in the European countries. In Bulgaria, this
number increased slightly to 5505 new jobs. In 2014, in Serbia, there was a significant reduction in this num-
ber since 5104 jobs were opened, and participation decreased to 3%, while Bulgaria maintained a constancy
of above 3% share (5688 jobs) in the total number of new working places opened thanks to FDI inflows into
European countries. Like many authors, Jensen (2003) concluded that FDI is an important element of the
global economy and a central component of economic development strategies of both developed and de-
veloping countries. Supporting the previous, Noorbakhsh, Paloni & Youssef (2001) added that FDIs are not
only a source of finance and employment but, for developing country governments, they can also be a
medium for acquiring skills, technology, organizational and managerial practices and access to markets.

2. Literature review

In this research, the opinions of many respected scientists dealing with various issues related to FDI are ac-
cepted and relevant literature is used. The research also highlights the similarities in the definition of FDIs,
current trends in their development as well as the impact of globalization on FDI inflows. Different views on
the impact of FDIs on the host country are mentioned, as well as the factors that affect the investment de-
cision making by foreign investors and decisions on the choice of investment location.

Many definitions of FDI can be found in literature, but they are generally based on conventional elements
which read: FDI is a form of international inter-firm cooperation that involves a significant equity stake in or
effective management control of host country enterprises. A large number of authors dealing with various
issues related to FDI emphasize the increase in their importance, especially in the era of global economy.
This is confirmed by Hallward-Driemeier (2003) who says that FDIs have surged dramatically over the last
two decades and more developing countries are competing to host these multinationals. As Stein & Daude
(2001) found, one of the most notorious features of the trend toward globalization in recent times has been
an increased importance of FDI around the world. The impact of globalization is also mentioned by Zeković
(2002) who in his work dealt with globalization and a more recent tendency in the development of economic
activities as factors that actuated a strategic allocation of capital and different models of FDI.

FDI will go to countries that pay a higher return on capital, but as Asiedu (2002) points out, finding an ap-
propriate measure for the return on investment is problematic, especially for developing countries. This is
because most developing countries do not have well-functioning capital markets and therefore it is difficult
to measure the return on capital. Markusen & Venables (1999) are just some of the authors who have con-
cluded that, over the past two decades, direct investments by multinational firms have grown significantly

2015/77Management

faster than trade flows. FDIs by MNCs have recently grown without precedent and Kugler (2006) noticed that
they especially penetrated middle-income countries such as Bulgaria and Serbia. He also mentioned that
during the 1990s the growth of FDI flows trebled the growth in international trade.

The impact of FDI on the host economy is a very common topic of many scientific studies and Gligorova (2007)
says, in relation to this impact, that it can be recognized in any one of three ways: (1) by stimulating development
in the country through GDP growth, export capacity growth and capital stock growth; (2) by improving technical
and know-how transfer in the host country; (3) by developing infrastructure that is consistent with environmental
standards. The positive impact of FDI is noted by Aitken, Hanson & Harrison (1997) who found that multinationals
which export their goods to foreign markets may induce domestic firms to follow suit, thus acting as “catalysts”
for domestic exporters. Taking into account that the analyzed countries are currently struggling with the conse-
quences of the global crisis, it is important to emphasize that FDI is the most desirable form of capital inflows to
emerging and developing countries, and, as Busse & Hefeker (2007) say, it is because those countries are less
susceptible to crises. FDI brings the potential for the development of new inputs, or the increase in the quality of
the existing ones, which may be possible due to the demand created by the foreign investment, but as Rodriguez-
Clare (19996) noticed, it may become available for domestic firms as well. The extraction and distribution of raw
materials produced in the host country may be facilitated by improving the network of transport and communi-
cation and Bengoa & Sanchez-Robles (2003) showed that this is possible thanks to FDI inflows. FDI could also
add up to economic growth simply by augmenting capital accumulation in the host country. This would require,
as Borensztein, De Gregorio & Lee (1998) highlighted, that FDI should not ‘crowd out’ equal amounts of invest-
ment from domestic sources by competing in product markets or �nancial markets (for example, under condi-
tions of �nancial repression). In addition, FDIs could increase economic growth if they were more productive, or
efficient, than domestic investments. New growth theories suggest that international transfers of technology and
knowledge through FDI may affect the performance of host economies (Barrell & Pain, 1999).

Host country policies can influence FDI flows and as Gastanaga, Nugent and Pashamova (1998) found, this
is possible primarily through their influence on the advantages of location in the host country. FDIs are seek-
ing quality domestic institutions. According to Yin-Li Tun, Azman-Saini & Siong-Hook Law (2012), this is be-
cause a good institution is able to create better environments for investors especially in terms of lower cost
of doing business, lower uncertainty and higher productivity prospect. Asiedu (2002) found that good infra-
structure increases the productivity of investments and therefore stimulates FDI flows. Good infrastructure is
a necessary condition for foreign investors to operate successfully, regardless of the type of FDI. Investment
decisions in emerging markets are also influenced by economic and political risks, confirmed Campos and
Kinoshita (2003). Successful implementation of economic reform by the host government is a good signal to
investors, as a stable macroeconomic environment implies less investment risk. Countries that want to attract
foreign investors, as Stein and Daude (2001) suggested, must strive to improve the quality of their institutions,
because that is a strategy which, in addition, should generate other positive externalities.

Some authors, such as Kaufmann, Kraay and Zoido-Lobaton (1999), talk about institutional variables as vari-
ables that influence the investment decision making and in that group they count regulatory burden, voice
and accountability, government effectiveness, political instability, graft and rule of law. As far as attracting FDI
is concerned, Benassy-Quere, Fontagne & Lahreche-Revil (2001) emphasize that both the level and the volatil-
ity of the exchange rate have to be taken into account, since they affect FDI. There are many authors who deal
with the impact of corruption on FDI inflows including Busse & Hefeker (2007), who argue that lower corrup-
tion and nationalization risk levels as well as better contract enforcement are associated with higher FDI inflows.
Exploring several factors that influence FDI inflows, Globerman & Shapiro (2002) conclude that, in addition to
governance infrastructure as infrastructure that can contribute to economic well-being and create a favorable
climate for FDI, physical infrastructure and the environment are also very important.

3. Methodology

The quantitative data, necessary for the research, have been collected using the desk method secondary
data source „The Investment Map Database”. This database collects yearly FDI statistics for about 200 coun-
tries and a detailed FDI sectoral and country breakdown for about 115 countries. In analyzing the data, we
have applied the method of description to describe the essential facts related to FDIs, their distribution by
economic activities as well as investment incentives offered by analyzed countries. In the further course of
the research we have used the comparative method and performed the comparison of the same elements,

Management 2015/77

similarities and differences in the trends and structure of FDI in Bulgaria and Serbia, with simultaneous com-
parison with the European average. The results of this research may be useful to scientific workers whose
object of interest is also FDI, to students as a supplement to the existing knowledge in the field of interna-
tional economics as well as to government agencies that work to improve the investment attractiveness of
the studied countries, attracting foreign investors and directing FDI to certain economic sectors.

4. Results and discussion

Since the year 2000 Bulgaria has become one of the most attractive investment locations in the Balkans,
which has expressly been pointed out after 2007, when it joined the EU. Buch & Piazolo (2001) find that a
cumulative result of (1) projected GDP growth rates, (2) the lack of exposure to the direct impact of the de-
faulting market instruments, as well as (3) the EU experience that a new member’s accession is often fol-
lowed on by a period of strong economic growth.

Bulgaria has attracted investors by macroeconomic and financial stability, strategic geographical position,
educated and specialized workforce, infrastructural subsidies for large investors and various support pro-
grams by the Government for priority investment projects as well as by peaceful political situation. Many sci-
entists note that the distribution of FDI depends on both economic and political determinants. Schneier &
Frey (1985) have long ago concluded that a country in which there was political unrest or in which there was
a threat of having the investment nationalized was more of a risk and therefore ceterus paribus less attrac-
tive to invest in than a country offering political stability and a guarantee of property rights.

The competitive rate of corporate tax of only 10% in Bulgaria has a stimulating effect on the investors and en-
courages them to go beyond the existing investments and to commence new investment ventures. In 2013,
as presented in Figure 1, the majority of investment projects, 76%, were realized in the area of manufacturing,
electricity, gas and steam supply, mining and quarrying, transport, storage and communication. The Bulgar-
ian economy has so far mostly experienced investments from Germany (Aurubis, Liebherr, Schneider Electric
and Siemens), Greece (Hellenic Petroleum, OTE and Viohalco), Austria (EVN and Palfinger), Belgium (Melexis
and Solvay), Spain (Roca and Keros), the USA (Hewlett Packard and Johnson Controls), Switzerland (Nestle),
the United Kingdom (Shell), Sweden (SKF) and Italy (Unicredito). In comparison witho other countries of the
region, it may be concluded that Bulgaria has fewer restrictions on foreign ownership. For example, as a mem-
ber of the EU, it is constantly harmonizing its legislation with the EU legislation, which results in the entry of for-
eign ownership in many sectors of the economy, so that there are currently no restrictions on foreign ownership
in 31,33% of economic sectors, as measured by the Investing Across Sectors indicators.

Figure 1: FDI by economic activities in Bulgaria in 2013
Serbia has long been a completely unattractive investment destination, avoided by the Western investors, es-

2015/77Management

pecially in the period of frequent political turmoil. According to Carstensen & Toubal (2004), besides the qual-
ity of the business environment, the overall political climate is also likely to influence FDI. More significant in-
vestments in the Serbian economy began only after 2000 when the political situation stabilized, the democratic
system of government got promoted, the privatization of the state sector commenced, and the conditions for
rapid economic recovery were created. Democratic political systems attract higher levels of FDI inflows both
across countries and within countries over time and democratic countries are predicted to attract as much
as 70 percent more FDI than their authoritarian counterparts (Jensen, 2003). Researching the same, Li &
Resnick (2003) concluded that if democratic governance hurts a country’s attractiveness to foreign investors,
the developing country faces a trade-off between competing for limited FDI and democratization.

In the period between 2005 and 2012, the majority of foreign investments in Serbia arrived from Austria, fol-
lowed by Norway, Germany, Luxembourg, Greece, the Netherlands, Italy, the Russian Federation, Slovenia
and Hungary. The companies that have so far invested the most funds in the Serbian economy are Telenor,
Fiat Automobili Serbia, Stada-Hemofarm, Philip Morris DIN, Eurobank EFG, Salford Investment Fund,
CEE/BIG shopping centers, National Bank of Greece, US Steel, Fondiaria SAI, Pepsi Co Marbo and British
American Tobacco South East Europe. It can be seen in Figure 2 that, in 2013, foreign investors mostly in-
vested in manufacturing, then wholesale and retail trade, financial intermediation and construction. As much
as 71% of FDI projects were realized in these economic sectors.

Figure 2: FDI by economic activities in Serbia in 2013

In order to encourage foreign investors to hire additional workers and their recruitment from the local pop-
ulation, Serbia has been applying an income tax rate of only 10%, which is the lowest among neighboring
countries. According to Slović (2012), taking into account tax incentives for investments, as well as any other
tax benefits, Serbia should, at this moment, from the aspect of tax treatment of foreign investments, repre-
sent one of the most attractive investment locations in the region. However, tax incentives as a factor of at-
traction of FDI come into play only after a favorable investment climate has been created, as observed from
the standpoint of other (non-tax) factors. The fact that in 2012 Serbia became a candidate for membership
in the EU has stimulated and encouraged many foreign investors to decisively and more confidently ap-
proach to investing their funds. EU announcements about potential accession have significant independent
effects on FDI flows to countries in transition by increasing FDI to countries whose likelihood of accession
is enhanced (Bevan & Estrin, 2004).

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In recent years, the interests of foreign investors in Bulgaria and Serbia as investment destinations have been growing, pri-
marily due to the creation of an attractive investment environment and getting closer to the EU. Carstensen & Toubal (2004)
conclude that the last decade has seen a remarkable growth of European but also US outward direct investments in tran-
sition countries in Europe. This growth is often regarded as being driven by the process of integration of these countries
into the EU and the associated elimination of the barriers to FDI and acceleration of the transition process of those
economies. Among other things, Bulgaria has encouraged FDI inflow by applying low rates of corporate income tax, while
Serbia does so through the rate of income tax which is the lowest in the region. In order to set up a business company in
Bulgaria, foreign investors must devote at least 20 days and undertake about 5 different procedures. In Serbia, it is nec-
essary to devote 14 days while undertaking 8 procedures, which is faster than the European average. In recent years, the
largest investors in both countries have been European companies, reaching as much as 90% in Serbia.

It is necessary to mention that FDI have also forced an increasing number of domestic manufacturers to compete glob-
ally (Chen & Zhang, 1995). In 2012 as well as in 2013, it was manufacturing that was the most attractive area of investment
into the analyzed countries. According to the data of EY’s Attractiveness Survey, a similar trend was recorded in other Eu-
ropean countries where, in 2012, 973 FDI projects were implemented in manufacturing and 101535 new jobs were pro-
vided, which amounts to nearly 60% of all jobs emerging as a result of FDI. It is believed that manufacturing is one of the
most attractive economic sectors to foreign investors which is going to attract the most investors in Europe in the coming
years (according to some research, 32% of all investment projects will be carried out in this area). Wholesale and retail
trades are a very interesting sector for foreign investors in Serbia with the share in total FDI projects of 11% in 2012 which
increased to 21% in 2013. According to the European average in the area of trade, in 2012, 1945 FDI projects were im-
plemented, which is significantly more than in the area of manufacturing, but at the same time far fewer jobs were provided
(19403 – 11% of the total number of new jobs). Taking into account all of the industries invested in, it may be noted that in
2013 in Bulgaria foreign investors have provided 5505, and in Serbia even 12179 new jobs, which places Serbia among
the top ten most successful European countries. It is important to emphasize that FDI can raise the quality of domestic
human capital and improve the know-how and managerial skills of local firms (Bengoa & Sanchez-Robles, 2003). When
talking about human capital, Branstetter (2006) found that FDI is an alternate, potentially equally important channel for the
mediation of knowledge spillovers.

By analyzing factors that disrupt business activities in Bulgaria and Serbia, which hinder foreign investors in making in-
vestment decisions, it is asserted that one of the leading factors is corruption. According to Habib & Zurawicki (2002) for-
eign investors generally avoid corruption because it is considered wrong and it can create operational inefficiencies. EYs
attractiveness survey (2015) says that the biggest threats to attractiveness, among the ten analyzed of all European coun-
tries as destinations for foreign investments are too much bureaucracy, low economic growth and lack of political gover-
nance at the EU level. These factors account for half of all threats. Even 46% of nearly a thousand foreign investors who
were surveyed said that they want stability and transparency of political, legal and regulatory framework and 48% of them
proposed to implement business-friendly reforms in host countries especially within the areas of competition, tax and labor
market.

In order to attract larger amounts of FDI in the future, Bulgaria and Serbia must implement attractive incentives, constantly
improve the investment ambience and create attractive investment locations while providing a multitude of benefits for
foreign investors. Therefore, rapid registration of business entities and minimal administrative activities at the opening and
construction of buildings certainly leave a positive impression on the foreign investor and encourage them to continue with
the initiated and engage in new projects. Campos and Kinoshita (2003) find that the host country institutions also influence
investment decisions, because they directly affect business operating conditions. The cost of investment consists of not
only the economic costs of investment, but also the non-economic costs, such as bribery and time lost in dealing with local
authorities. According to Smarzynska Javoricik (2004) governments all over the world compete to attract FDI hoping that
multinational corporations will bring new technologies, management skills and marketing know-how. In order to create an
investment friendly environment, it is important to understand the factors that influence FDI inflows as well as the deter-
minants of the composition of such flows. It is very welcome that, in addition to the said incentives, financial support for
foreign investors is also provided, i.e., financial grants within various government programs are awarded.

Conslusion

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Receieved: October 2014.
Accepted: November 2015.

Biljana Stankov
Higher School of Professional Business Studies in Novi Sad, Serbia

Biljana Stankov is an MSc holder in Economics employed as teaching assistant at
Higher School of Professional Business Studies in Novi Sad. During many years of

working in higher education, first as an associate and then a teaching assistant, she
dealt with various subjects in the field of economics. She completed undergraduate

academic studies and masters studies in the field of marketing management and
European economy. Currently she is a final year student of doctoral studies at the

Faculty of Economics and Engineering Management in Novi Sad, University Business
Academy at the Business Economics study program. She participated in many

international scientific conferences and has published several papers in scientific
journals. The key fields of her interest and future development are foreign direct

investments, competitiveness, international and European economy.

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About the Author

Jasmina Markov
Faculty of Economics in Subotica, Serbia

Jasmina Markov completed undergraduate studies at the Faculty of Economics in
Subotica, Department of Novi Sad, where she completed her masters studies as well.

Her fields of interest during these studies were marketing and trade. In the year of 2010
she started her doctoral studies at the same Faculty, in the Management and Business

study program, Marketing module. From 2008 to 2013 she worked at the Higher School
of Professional Business Studies in Novi Sad, as an assistant - master in the specialized

field of Business Economics and Management. In addition, she spent a year
volunteering in the Government of the Autonomous Province of Vojvodina in the

Province Secretariat for Education and Culture. She has also published several papers
in scientific journals and has participated in numerous international conferences.

Ivana Milošević
Faculty of Economics and Engineering Management in Novi Sad, Serbia

Ivana Milošević graduated in 2009, at the Faculty of Economics in Novi Sad,
GPA 8.80, and completed her masters studies in 2013, GPA 9.67, at the Faculty of

Agriculture in Novi Sad. She commenced her PhD studies in 2013, at the Faculty of
Economics and Engineering Management in Novi Sad - University Business Academy in
Novi Sad (program of study: Business Economics). She is engaged at the same Faculty

as an assistant in the following subjects: Macroeconomics, National Economy and
Public Finance and has also participated in the process of accreditation and self-

evaluation of the Faculty. She is engaged in the program of continuous professional
development of teachers, educators, experts and directors for 2014/2015 and

2015/2016 school years under the auspices of ZUOV (Ministry of Education,
Science and Technological Development).

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