Investor Perceptions of Bulgaria

1
Investor Perceptions of Bulgarias Competitive
Opportunities and Constraints Labor Market Focus
October 2004
2
Project Objectives

• Understand key factors used by investors in
  different sectors/industries in determining
  whether/where to invest/expand
• Understand Bulgarias relative position in
  various sectors and implications for labor market
  policies and programs

3
Methodology

• Interviews
• 99 international companies
• 60 Bulgarian companies
• Economic Sector / Industry
• Packaged food consumer products
• Electronic components
• Textiles and apparel
• Travel and tourism
• IT and export oriented services
• Services domestic market

4
Methodology (cont.)

• Interviews vs. Statistical Survey
• Methodology designed for deeper insights
• Benchmarking- southeastern/central Europe
• Labor code features
• Labor costs
• Focus on three aspects of labor market
• Labor cost
• Labor quality
• Flexibility of regulations

5
Strategic Conclusions

• Bulgarias labor code and market is reasonably
  competitive with others in the region. However
• With the transformation of the economy, driven
  by globalization and the increasing role of
  services and small business
• Does the regulatory framework provide the
  necessary flexibility for the 21st century
  economy?
• With value added increasingly determined by
  know- how and skills
• Does the educational/training system respond
  flexibly enough to the needs of the market?

6
Investment Factors
Economic Sector / Industry Key factors in investment decisions Relative weight of labor market factors
Packaged food consumer products Market purchasing power Access to markets Access to inputs Low
Electronic components manufacturing assembly Labor cost/productivity Logistics cost/speed for imports/exports High
Textiles Quota/market access Labor cost/productivity Full service/package High
Travel and tourism Tourism products Related infrastructure Low-Medium
IT and export oriented services Telecoms/infrastructure Labor quality/cost High
Services domestic market Business policy/regulatory climate Low-medium
7
Labor Cost
Economic Sector / Industry International Perceptions of Labor Cost Bulgarian Perceptions of Labor Cost
Packaged food consumer products Competitive Social taxes too high Social taxes too high
Electronic components manufacturing assembly Competitive compared to Ukraine and Romania China is the benchmark Not applicable
Textiles and apparel Competitive Social taxes too high
Travel and tourism Somewhat competitive Not a significant issue
IT and export oriented services Social taxes too high India is the benchmark Social taxes too high
Services domestic market Social taxes too high Social taxes too high
8
Flexibility of Labor Regulations
Economic Sector / Industry International Perceptions Bulgarian Perceptions
Packaged food consumer products Comparable/slightly better countries in the region Rules on overtime, contract employees, etc. too rigid Rules tending toward inflexibility Food processors need more flexibility for seasonal labor
Electronic components manufacturing assembly Sufficient flexibility for changing market conditions Not applicable
Textiles and apparel Mixed Becoming more rigid Hiring/firing and overtime restrictions too rigid
Travel and tourism Not a major issue Labor rules not a major factor Need flexibility due to seasonality
IT and export oriented services Not flexible enough Labor Code antiquated Limits on overtime direct employer negotiation with employees is major problem
Services domestic market Labor Code unclear/complex Labor Code too restrictive Bureaucratic processes are cumbersome
9
Labor Quality
Economic Sector / Industry International Perceptions Bulgarian Perceptions
Packaged food consumer products Limited talent pool No incentives to invest in human resources
Electronic components manufacturing assembly Trainable Limited talent pool Not applicable
Textiles and apparel Shortages of experienced, skilled workers Labor productivity low Poor quality people from govt training programs
Travel and tourism Some skill shortages Some customer service training needed Lack of practical training Lack of incentives to develop staff
IT and export oriented services Tax system discourages investment in people Emigration high Lack of incentives for training/hiring University education not tailored to industry needs?
Services domestic market Limited talent pool Shortage of key skills and practical experience
10
Labor Market Perceptions

• Pressing Concerns
• Lack of people with practical skills and
  experience
• The failure of the education/training
  institutions to provide the skills demanded by
  industries
• The lack of incentives for companies to develop
  and train staff
• Labor regulation and programs designed for
  traditional manufacturing
• Fail to meet the needs of highly specific,
  knowledge driven and people based companies
• Social taxes are perceived as too high

11
Comparative Labor Market Indicators

• Empirical data confirms the impression of most
  international investors that labor regulations
  are neither a major problem nor an advantage

12
Comparative Labor Market Indicators
Flexibility Indicators 2004 (from World Bank,
Doing Business) Index 0-100 with higher numbers
showing greater rigidity)
Bulgaria Croatia Romania Serbia Ukraine Czech Hungary Slovakia
Difficulty of hiring index 33 61 78 28 33 44 11 0
Rigidity of hours index 40 60 60 0 80 20 80 20
Difficulty of firing index 10 50 50 40 80 20 30 10
Rigidity of employment index 28 57 63 23 64 28 40 10
Firing costs (weeks) 30 55 98 21 94 22 34 17
13
Strategic Opportunities forInvestment Attraction
and Job Creation
Economic Sector / Industry Perceived Opportunities for Bulgaria
Packaged food consumer products Lower cost base for serving Greece and Turkey Eventual exports to EU Selected acquisitions niches (wines, agribusiness)
Electronic components manufacturing assembly Limited prospects Neither lowest cost location nor logistics hub
Textiles and apparel Full package and mid/higher fashion garments Rapid response to EU customer needs
Travel and tourism Business hotels in cities
IT and export oriented services Specific product and market niches
Services domestic market All other industries require quality services of all kinds, as do consumers
14
Strategic Opportunities forInvestment Attraction
and Job Creation
Economic Sector / Industry Relative Potential for New Investment Jobs
Packaged food consumer products Low / medium Limited international investor interest Competitiveness of Bulgarian companies questionable
Electronic components manufacturing assembly Low Few international investors show interest
Textiles and apparel High Double or triple current levels
Travel and tourism Medium International Interest in business hotels Bulgarian investment in tourism product
IT and export oriented services Medium / High Dependant on ability to train and retain staff
Services domestic market High Trend began w/ finance, advertising, telecoms retail Untapped potential remains large
15
Strategic Opportunities forInvestment Attraction
and Job Creation

• Investors see potential for Bulgaria if there are
  improvements in
• Infrastructure
• Education
• Training
• Regulatory efficiency

16
Strategic Recommendations

• 1. Develop a more flexible Labor Code and
  regulatory framework reflecting structural
  economic change
• Considerations
• Does one set of standardized rules work for all
  sectors?
• Are the needs of employers/employees well served?
• When should employers be able to negotiate
  directly with employees?
• Do the Labor Code and other laws provide
  incentives for investment in staff development?

17
Strategic Recommendations
Strategic Recommendations

• 2. Educational training establishments must be
  responsive to the evolving economy
• Possible initiatives
• Development of certification programs to provide
  students with industry specific and/or functional
  skills
• Development of internship programs where
  participants get practical experience
• Follow-through of the Bologna Convention

18
Strategic Recommendations
Strategic Recommendations

• 3. Ensure that tax regimes encourage employment,
  investment in human capital, and increased
  business productivity
• Considerations
• How to establish optimum level of taxes that
  minimizes evasion, allows for financial solvency
  of social programs, and does not unduly hurt
  competitiveness and new investment?
• Investment by employers in workforce development
  should be viewed as a deductible expense or tax
  credit