Author(s):
1. Milen Velushev, Bulgaria

Abstract:
Compared to other former socialist European countries, Bulgaria was less successful to improve the economy’s productivity, thus continuing to diverge from the development of it’s peers. Solow - Swan growth model is giving a possible explanation for the situation– insufficient investments cause the economic growth to reach steady state of low growth, due to lack of capital deepening. Like many scholars, I see the remedy for insufficient national investments in attracting foreign direct investments. The vast volume of research on FDI phenomenon gives us a clear idea that they are an important source of capital. Furthermore FDI are a source of technological transfer, usually introduce managerial practices new to the host country economy and cause spillover effects, occurring from horizontal and vertical linkages between a multinational company subsidiary and local suppliers and customers. The object of research is the effect that inward FDI have on the development of Bulgarian economy. I consider that the best indicator to show the effect of introducing additional capital is to monitor for change of factor productivity in the host economy. The level of productivity is linked to national competitiveness, so naturally, I turn to this measure in order to analyze the significance of inward FDI for the economy. The study is divided into two parts. The first one is a discussion of theoretical basis for the analysis and the relationship between FDI and national competitiveness. The prime conclusion of this part is that inward FDI should not be viewed as homogeneous, regarding their effect on national competitiveness of the host country. There are two distinct groups – horizontal FDI and vertical FDI that, although having the same required return, have different investment horizons, different economies of scale objectives and target different markets. Thus the division is based on the tradability of goods and services produced- tradable or non-tradable. The second part focuses on developing a model of the relationship and testing against it the existing statistical data about the competitiveness of Bulgarian economy and inward foreign direct investments. The biggest difference between the proposed model and the reference models is the introduction of a FDI coefficient, called “Export potential of FDI”, that accounts for the heterogeneity of inward FDI and is based on tradability of the goods and services produced. The research suggests that the introduced FDI coefficient is a significant factor for the level of national competitiveness in the case of Bulgaria. It has the potential to show the policymakers what is the ability of national economy to generate return on investments and the sources of this return; is there non-tradable sector production factors cost pressure over the overall domestic price level; what is the potential for export-oriented industries forming and growing.

Date of abstract submission:
24.01.2014.

Conference:
REDETE 2014 - Researching Economic Development and Entrepreneurship in Transition Economies