Which Districts Attract the Most Significant Investments and Why?

Preface

Before the world economic crisis, Bulgaria managed to become one of the top destinations for foreign direct investments (FDI) not only on regional scale but on a global one, too. A few countries could boast about an inflow of foreign direct investments at the rate of 30% of GDP only per one year. That is exactly what happened in 2007 when Bulgaria ranked among the top countries with regard to attracted investments. The boom in the construction and real estate businesses, followed by a credit expansion and a quick increase in the domestic demand, was the main incentive for foreign investments in 2008. The opportunities in the construction business and the related sector of real estates attracted about 30% of the total foreign direct investments.

Nonetheless, foreign direct investments from 2000 to 2008 were not allocated to these two sectors only. The boom of financial services, particularly loans to businesses and individuals during the years of growth of manufacturing and consumption, also attracted a serious share of almost 20% of all foreign direct investments during the 2000–2008 period. Manufacturing got a similar share (17%) in the total amount of foreign direct investments during that period of rapid economic growth. The sectors related to the construction and the consumption boom such as the manufacturing of vehicles and furniture were among those that benefited the most. Investments were also made in the trade and repair services sectors – about 18% of the total amount of investments for the 2000–2008 period.

Figure 1: Share of total FDI for the 2000-2008 period, %

Source: NSI

The serious differences in the capacity of individual districts of Bulgaria to attract foreign direct investments deepened the gap between the more developed and richer ones, on the one hand, and the poor and lagging ones, on the other. The strong positive relation between the main indicator of well-being – GDP per capita – and the cumulative foreign direct investments (per capita) is clearly visible from the data pertaining to the two indicators as at 2011. The correlation coefficient between the two indicators is 0.9 (the maximum allowable rate being 1), which shows a high degree of approximation to complete linear dependence between these two indicators that are important for the economic development. This means that the districts with the most considerable inflow of foreign investments are the ones that have the highest well-being and incomes, measured by GDP per capita.

Figure 2: Relation between FDI and GDP per capita at the district level

Source: NSI, IME calculations

This strong correlation between foreign direct investments and well-being on regional level is not surprising in view of the opportunities for economic development, employment and incomes that foreign investments imply. Simultaneously, the higher degree of development of districts constitutes a factor in attracting foreign investments due to the better purchasing power of the local population, the higher number of functional companies that could be rendered business services to, the advantages (logistical and infrastructural) of constructed business centres, the opportunities for synergy with existing business activities, the higher quality of human capital, the wider choice of (qualified) workforce, etc. This means that the relation between foreign investments and GDP is a two-way one. Foreign direct investments are an indisputable factor in economic growth, especially for less developed economies like the Bulgarian one, wherein domestic savings are relatively low, but, simultaneously, there is a trend foreign direct investments to be allocated to bigger business centres because of the positive features arising out of the constructed infrastructure, the bigger supply of workforce and the bigger market for business activities and consumer goods and services, which these territories offer.

The most attractive destinations for foreign investments in Bulgaria

Till 2008, the most attractive districts for foreign investments were the ones where the construction boom was most intensive: Sofia (capital), the neighbouring Sofia and Bourgas districts and the districts of Burgas and Varna. Thus, foreign investments were simultaneously a factor and a consequence of the fast growth of construction and real estates during the years before the crisis. After 2008, even if these five districts remain among the most preferred desitinations for foreibn investments, industrial centres such as Gabrovo, Stara Zagora and Plovdiv have also climbed among the most attractive districts. The rapid export growth during the period of recovery from the crisis has probably contributed to this, having in mind that a significant part of Bulgaria’s export consists of industrial products.

The allocation of (cumulative) foreign direct investments in Bulgaria shows that the capital city is an indisputable leader both during the period of fast growth and the ensuing crisis and recovery. Sofia (capital) kept its leading position as at the end of 2012, though it reported disinvestments, i.e. net outflow of foreign investments, compared to 2008. As at the end of 2008, Sofia (capital) has attracted foreign direct investments amounting to approximately 11.7 billion EUR, or 9,383 EUR per capita. For comparison, the second most attractive district with regard to foreign investments as at the end of 2008 – Varna – has had three times less attracted investments per capita: 3,396 euros. The huge discrepancy between the capital city and the other districts also boosts the average of attracted foreign investments in Bulgaria, related to the population, to 2,444 euros per capita as at the end of 2008. Thus, three districts only could boast about investments exceeding the country’s average: the capital city, Varna and Sofia District.

The gap between the districts in respect of foreign direct investments attracted by them is illustrated by the difference between the leader, Sofia (capital), and the worst-performing district as at 2008 – Kyustendil. This gap is 70 times to the benefit of the capital city, as Kyustendil has barely managed to attract foreign direct investments of 135 euros per capita (cumulative) as at 2008.

During the period of the crisis and the difficult recovery from it, the discrepancies between Sofia (capital) and the other leading destinations in terms of foreign investments has decreased, but the contrasts between the districts that are most attractive and least attractive for foreign investors remain. The decreasing difference between the capital, which has also remained an undisputed leader as at 2012, and the other most attractive regions with regard to foreign direct investments – Burgas and Sofia District – is due to the net outflow of foreign investments from Sofia City, and also due to the sharp increase of investment to the other two districts. When compared to 2008, Burgas has managed to triple the cumulative attracted investments as at the end of 2012: from 667 million euros to just over 2 billion euros, owing mostly to the investments in Lukoil Neftochim. Sofia District, on its part, has managed to report a double increase in foreign direct investments during the same period of time – from 663 million euros as at the end of 2008 to 1.323 billion euros as at the end of 2012, which is probably due to the proximity to the capital city, the bigger opportunities for acquiring appropriate plots and the relatively lower prices thereof in comparison with Sofia City.

Varna District, which had ranked second after the capital city in terms of attractiveness for foreign investments till the beginning of the crisis, has also reported disinvestments, i.e. net outflow of foreign capital, from 2009 to 2012. Therefore, Varna District has ranked fourth as at the end of 2012 in terms of attractiveness for foreign investments (as per the cumulative investments per capita), being outranked by the districts of Sofia and Burgas.

Figure 3: Cumulative FDI as of end-2012, EUR per capita

Source: NSI, IME calculations

The most attractive destinations for investments in fixed tangible assets

A strong positive correlation is being observed between the cumulative foreign direct investments and the long-term average of investments in fixed tangible assets (FTAs). This correlation is based on the fact that a significant part of foreign direct investments has been directed to the non-financial sector, namely to acquiring FTAs. Nonetheless, it should be considered that costs for the acquisition of fixed tangible assets include also capital investments by public institutions (Parliament, the Council of Ministers, the judiciary, bodies of local self-government and autonomous public institutions), as well as investments in FTAs made by companies with domestic capital.

Figure 4: Relation between FDI and expenditures for the acquisition of fixed tangible assets

Source: NSI, IME calculations

It is notable that districts with the highest average rate of cost for the acquisition of fixed tangible assets from 2000 to 2012 have been those that feature the highest cumulative inflow of foreign direct investments, though with certain rank changes. Moreover, the discrepancies between the districts are not so striking in relation to investments in FTAs, although they remain significant. During the period of 2000-2012, the capital city was the leader again with an yearly average of 5,667 BGN per capita in FTAs investments. Kardzhali District ranked last with an average of 510 BGN per capita, i.e. the gap between the first and the last district has been about ten times.

The districts of Burgas, Plovdiv, Sofia, Stara Zagora and Varna followed the capital city in terms of average costs for FTAs during the period 2000–2012.

Investments and graduates

The relative share of graduates in the population of working age can be interpreted as an indicator of the quality of human capital since it presumes higher labour productivity. One of the factors pertaining to attracting investments is the available human capital in each district of Bulgaria. Of course, just like investments are being attracted by quality human capital, human capital is also being attracted by job opportunities that investments offer. It should be noted that not all investments (foreign and domestic) need graduates, which is why there is an increasing number of enterprises (especially in manufacturing) that face difficulties in finding personnel with appropriate secondary vocational education.

Nonetheless, the positive relation between the share of graduates and investments is clearly visible. This correlation is strong with regard to both basic indicators of investments – foreign direct investments per capita (cumulative) and annual costs for acquiring fixed tangible assets.

1. Correlation between foreign direct investments and graduates

The correlation between the cumulative amount of foreign direct investments and the share of graduates in the local population is positive and moderately strong. It has been stronger throughout the years before the crisis (RІ = 0.724 in 2008) probably due to the low unemployment rate and the number of attracted investments; however, it has remained moderately high (RІ = 0.400 in 2012) after that. Sofia City has been very different from the rest of districts in terms of both the share of graduates (43-46%, 18-26% being for Bulgaria from 2006 to 2013) before and after the crisis and the stock and flow of cumulative foreign direct investments (about and more than 9,000 euros per capita in cumulative terms for the period 2008-2012; Bulgaria’s average for the same period of time has been 2,500–3,000 euros per capita).

Figure 5: Relation between FDI and the share of the population aged 25-64 with tertiary education

Source: NSI, IME calculations

It should be noted that not only is there a static positive correlation between the share of graduates and foreign investments, but there is also a dynamic one, i.e. the share of graduates drop when investments decrease, and vice versa. Of course, the same two-way relation could be presumed at this point as well – when investments increase in a district, qualified persons from other districts, who look for more career opportunities and higher incomes, are also being attracted. Conversely, if the share of graduates in the local population increases, this may make more investors choose the relevant district in expectation of finding the necessary workforce easily.

Since the beginning of the crisis, Sofia (capital) has reported the most significant drop in terms of both the relative share of graduates and attracted direct investments. The main cause for that is the concentration of a bigger part of industries that were mostly affected by the crisis (construction and operations with real estates), exactly in Sofia. Considering that a bigger part of dismissed workers after the beginning of the crisis were the low-skilled and the poorly educated, it could be presumed that one part of them had headed for the capital city in search of jobs, which statistically had decreased the share of graduates among the people of Sofia. Nonetheless, although foreign direct investments in Sofia decreased by 32 million BGN from 2009 to 2012, this decrease was only 0.3%.

Burgas District constitutes the absolute opposite of the capital city. It reported a relatively good increase in terms of both indicators: growth of the relative share of graduates – by 4.1%, and growth of foreign direct investments – by more than 3,000 euros per capita for the period 2009-2012. Considering this growth of foreign direct investments, in 2012 Burgas became the third district (following Sofia and Sofia City) in terms of the biggest rate of attracted foreign direct investments per capita; thus it outranked the districts of Gabrovo, Pernik and Varna. In addition, Burgas and Sofia City were the only regions wherein both foreign direct investments and costs for the acquisition of fixed tangible assets per capita were higher in 2012 than the average for the country. The relatively quick pace of recovery of the economy of Burgas District and the increasing investments stirred the labour market and the employment rate in 2012, and it already exceeded the average for Bulgaria in 2013.

Sofia District, as a district that is adjacent to the capital city, also reported a serious increase of foreign direct investments for the period 2008–2012, which was accompanied by an increase in the share of graduates that was close to Bulgaria’s average growth rate. The districts of Blagoevgrad and Plovdiv reported increases among the top ones concerning the relative share of graduates – by about 4 percentage points, and an increase in investments comparable to the country’s average rate, or about 50% increase of foreign direct investments per capita.

Figure 6: Relation between the change in the relative share of the population aged 25-64 with tertiary education and the change in cumulative FDI to non-financial enterprises per capita in the 2008-2012 period at the district level

Source: NSI, IME calculations

2. Correlation between investments in fixed tangible assets and graduates

The positive correlation between investments in fixed tangible assets and the share of graduates is also clearly demonstrated. This correlation demonstrates that not only does the foreign capital look for qualified workforce, but the local one as well, and also that labour resources move to districts where there are functioning enterprises and investments, whether foreign or local. The positive interdependence of both indicators – costs for acquiring FTAs per capita and share of graduates in the local population – was valid both before the crisis (2008) and also after that (2012), even it was stronger in 2012. The latter could be explained with the labour market crisis in Bulgaria from 2009–2012, and the termination of about 460,000 jobs, which caused a steady growth rate of unemployment and shrinking employment. It could respectively be presumed that investors have become choosier with regard to the quality of demanded and employed workforce in view of the increased supply thereof.

Figure 7: Relation between the relative share of the population aged 25-64 with tertiary education and expenditure on the acquisition of fixed tangible assets

Source: NSI, IME calculations

Investments and net migration

Investments create jobs and attract workforce. Simultaneously, the availability of bigger workforce, and especially one that has the education and qualification necessary for investors, constitutes a factor which is usually considered positive when deciding about an investment. The more labour intensive the branch of activity is, the heavier is the weight of this factor when making an investment decision. Due to these reasons, the correlation between investments, both foreign and domestic, and the migration of people within Bulgaria could be followed up.

1. Foreign investments and migration of the population

Data on accrued foreign direct investments in non-financial enterprises, and the net migration rate for 2008, show a positive correlation between the two indicators. It is understandable that the capital city has attracted the most investments and a huge number of people. This is the only district wherein there has been a positive net migration for the past two decades. In 2008, the coefficient was 5.7‰, and foreign direct investments reached 9,400 euros per capita, which is four times higher than Bulgaria’s level. The employment rate of the population aged 15+ (annual average) exceeded 60%, and it was 10 percentage points higher than the average rate for Bulgaria.

Generally, the larger districts have managed to attract more investments and people. In 2008, Varna was the district that had attracted the biggest number of people, and it ranked second in terms of accrued foreign investments per capita. Burgas, Veliko Tarnovo and Plovdiv add to the districts with a positive net migration rate. Smolyan District had the lowest net migration rate – 8.7‰, and foreign direct investments were 656 euros per capita, being 2,500 euros on average for Bulgaria. The districts of Montana and Kyustendil had the lowest levels of foreign direct investments, and there was also a negative net migration rate.

Figure 8: Relation between the net migration rate and cumulative FDI to non-financial enterprises as of end-2008 at the district level

Source: NSI, IME calculations

Since the start of the world financial and economic crisis, investments and employment have started to constrict across the board. The difference between strict-level net migration rates has increased, and net migration has dropped below minus 13‰ in Razgrad and Smolyan.

In 2012, the economy started to grow and the difference began to narrow, but the correlation between foreign investments and net migration rates increased. Smolyan remained the worst performing district with regard to the net migration rate though the rate improved to minus 7‰. Bigger districts started to attract an increasing number of people. 2013 data on the net migration rate show even bigger domestic migration from small to big districts. Emigration from Smolyan doubled, and Varna and Burgas have started to attract more people again and have reached a net migration rate of 4‰, while this rate was negative during the worst crisis.

Figure 9: Relation between the net migration rate and cumulative FDI to non-financial enterprises as of end-2012 at the district level

Source: NSI, IME calculations

2. Investments in fixed tangible assets and migration of the population

The correlation between investments in fixed tangible assets and the domestic migration of the population is also strong and positive, i.e. districts, which have a net inflow of people migrating from other districts, also attract more investments in fixed tangible assets – both domestic and foreign. The causality is two-way for these two indicators as well.

Figure 10: Relation between expenditure on the acquisition of fixed tangible assets and the net migration rate

Source: NSI, IME calculations

This correlation is even stronger than the one between foreign direct investments and the net migration rate, which can be explained with the fact that investments in fixed tangible assets encompass both domestic and foreign entities, i.e. they are the more comprehensive indicator in terms of the investing entity’s property. It is not surprising that in districts where more investments are made, there is a net inflow of people from other districts.

Investments and age dependence of the population

Developing a business needs human capital. Investors consider the available workforce and, on their part, attract people who search for jobs. A correlation between the investments inflow on the one hand and the share of people of working age in a district on the other could be researched on this account. The data on foreign (FDIs) and domestic investments (FTA expenditure) and the age dependency ratio on regional level, which shows the proportion of the population aged 65+ to the population of working age (aged 15 to 64), could be used for this purpose.

1. Foreign investments and age dependency

The data on foreign direct investments and the age dependency demonstrate a clear negative correlation between them. Districts featuring lower age dependency, i.e. the ones where the share of the working-age population is relatively high, attract more foreign investments as well. The inverse relationship is also true – districts where there are more investments, and more jobs respectively, also attract more people of working age that look for jobs.

Figure 11: Relation between the age dependency ratio (65+ to 15-64) and cumulative FDI to non-financial enterprises as of end-2012 at the district level

Source: NSI, IME calculations

Sofia (capital) once again stands out against the rest of the country, featuring the lowest age dependency ratio (22.7%; 28.5% being the ratio for Bulgaria in 2012) and the highest cumulative stock of foreign investments (more than 9,000 euros per capita; 3,000 euros per capita being the average for the country in 2012). The districts of Burgas and Varna feature a relatively high stock of foreign direct investments and a low age dependency ratio. The districts of Sofia, Stara Zagora and Plovdiv have similar levels of foreign investments, but can be considered ‘more ageing’ districts. Vidin also stands out from the most of districts, featuring the most rapidly ageing population (age dependency ratio of 65+/15-64 was 42.8% in 2012) and one of the lowest rates of foreign investments.

2. Investments in fixed tangible assets and age dependency

The correlation between the age dependency ratio – as a proportion of the population aged 65+ to the population aged 15 to 64 – and the expenditure on the acquisition of fixed tangible assets per capita is analogous to the one between the age dependency ratio and foreign direct investments. The annual average data for the period 2001-2012 demonstrate a clear negative correlation, which means that a higher share of the population of working age attracts more investments, and investments in fixed tangible assets attract more workforce (correlations involving the net migration rate have been studied above).

Conclusion

The allocation of foreign investments and the expenditure on fixed tangible assets on the territory of Bulgaria demonstrate huge discrepancies between the districts. Nonetheless, the gaps between the most attractive districts in terms of investments and the least attractive ones, respectively, clearly narrowed after the beginning of the economic crisis (2009).

The stock and flow of attracted domestic and foreign investments are highly related to the local well-being, measured via the GDP per capita indicator. This correlation is not surprising and it features a two-way dependence. On the one hand, the more a territory attracts investments, the more its economy thrives, and incomes increase. On the other hand, the high degree of development of a district, considerable business activities and high incomes also attract investments due to the bigger potential of the local market and the broad opportunities for synergy and cooperation with other types of businesses.

It is not surprising that the capital city preserved its top rank with regard to attracted domestic and foreign investments both during the period of high economic growth till 2008 and thereafter. Nonetheless, in 2009–2012 Sofia (capital) reported a net outflow of foreign capital, which is one of the reasons for the diminishing discrepancies between it and the worst-performing districts with regard to foreign direct investments. Analogously, the significant decrease of expenditure on fixed tangible assets in Sofia since 2009 has also contributed to diminishing the discrepancies with the worst-performing districts in respect of this indicator.

It is notable that the indicators of investments on regional level demonstrate strong or moderate correlation with a number of indicators concerning the availability and the quality of human capital. In particular, from the data of the National Statistical Institute, clear two-way relations become visible between:

• Investments and the share of graduates in the local population – investors are being attracted by workforce with higher productivity, and the workforce follows better job opportunities, higher incomes and desired careers.
• Investments and the net migration rate – investments and job opportunities attract more workforce, which is one of the factors determining the domestic migration of the population. At the same time, the availability of sufficient workforce, i.e. the lack of sustainable trends of emigration or the availability of net inflow of migrants coming from other districts, is also a factor regarded by investors, and it usually has its weight when making an investment decision.
• Investments and the age dependency ratio – investments search for, and in turn attract people of working age. A clear positive correlation between the relatively more favourable age dependency ratios and investment indicators has been identified.

If we have to summarise, the availability of sufficient workforce and also the quality thereof are simultaneously a factor and a consequence of attracting investments. This conclusion is equally valid for both local and foreign investments. That is why educating and training the workforce should be a priority when drafting national and local strategies for attracting investments. In parallel to this, the policy of overcoming the severe demographic crisis in certain parts of Bulgaria should obligatorily focus on enhancing the investment environment, because it is investments that create jobs and incomes, thus preserving and attracting young people in these districts.