-  46  -

driven’ exports and strong expansion of exports of other parts and engineering products point to significant progress in industrial restructuring and ensuing gains in competitiveness.

# **6. Foreign Direct Investment and Trade**

The empirical evidence on links between FDI and trade point not only to the complementary relationship between FDI and exports<sup>23</sup> but also to increasingly stronger links due to the growing fragmentation of production combined with the creation of distribution networks spanning across continents. Global diffusion of productive activity leads to an increased international trade in both final goods and parts and components. Thus, about one-third of world trade consists of intra-firm trade, that is trade among various parts of a single corporation, and the importance of intra-firm trade has been growing over time. Estimates also suggest that about twothirds of world trade in the latter half of the 1990s involved multinational corporations, including both intra-firm trade and arms-length transactions (UNCTAD 2002, p. 153). In consequence, the issue has become where firms locate their value added activities rather than whether FDI leads to trade or the other way around.

# **A.** _Why limited impact in the 1990s?_

For Bulgaria, throughout most of the 1990s, the issue of links of FDI with trade was of little relevance for four reasons. First, Bulgaria—because of the combination of moratorium on private debt and rescheduling until the 1994 Club of London agreement resolved the rescheduling issue and unreformed economic regime—was not a significant recipient of FDI until 1997. In this year alone, the value of FDI of US$ 537 was 47 percent above the cumulative inflows in 1990-96, which on average amounted to US$ 68 per capita (Table 35). In all, 78 percent of cumulative FDI inflows over 1990-1999 came in 1997-99. Although FDI were on average above five percent of Bulgaria’s FDI in 1997-99, given lead times and their concentration in nontradables, they had limited impact on trade in this period.

**Table 35:** _FDI inflows to Bulgaria and CEEC-10 countries in 1991-96, 1997-1999 and 2000-2003_

||Average<br>of<br>1991-<br>96|FDI (in<br>US dollar<br>1997-<br>99|millions<br>s<br>2000-<br>03|Avera<br>cap<br>d<br>1991-<br>96|ge FDI<br>ita (in U<br>ollars)<br>1997-<br>99|per<br>S<br>2000<br>-03|FDI as<br>avera<br>1991-<br>96|a perc<br>ge GD<br>1997<br>-99|ent of<br>P in<br>2000<br>-03<br>|Cumulative<br>Total (mln<br>of$ dollars)|FDI over 19<br>terms of<br>Per capita<br>inUS$|91-2003 in<br>cumulative<br>GDP|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Bulgaria|68|620|1,205|9|79|154|0.6|5.2|7.8|7,129|911|<br>3.9|
|Czech Republic|1,020|3,772|6,197|100|370|607|2.5|6.9|9.4|42,640|4,180|<br>6.4|
|Estonia|132|339|477|98|251|354|3.2|6.8|7.4|3,735|2,767|<br>5.7|
|Hungary|2,191|1,930|1,511|216|191|149|5.5|4.1|2.5|24,772|2,448|<br>3.9|
|Latvia|117|406|327|50|175|141|2.2|6.6|4.0|3,323|1,432|<br>4.0|
|Lithuania|32|580|530|9|168|153|0.4|5.5|3.8|4,137|1,198|<br>3.1|
|Poland|1,644|4,880|5,799|43|128|152|1.6|3.0|3.1|50,551|1,323|<br>2.7|
|Romania|194|1,432|1,122|9|65|51|0.6|3.8|2.4|10,017|451|<br>2.1|
|Slovakia|153|386|2,475|29|72|460|1.0|1.8|10.2|12,104|2,249|<br>4.8|
|Slovenia|96|241|1,107|49|123|564|0.6|1.3|5.1|5,817|2,962|<br>2.5|
|**TOTAL or**|5,616|14,588|20,749|55|142|201|2.1|3.9|4.6|164,225|1,594|<br>3.6|
|**average**<br>Memorandum: B|ulgaria||||||||||||
|Percent of the<br>average or total|1.2|4.3|5.8|15.9|56.0|76.4|30.4|133|170|4.3|57.2|<br>108|

Source: various issues of Economic Survey for Europe (UN Economic Commission for Europe), EBRD Transition Reports and World Development Indicators 2003.

Second, one has significant doubts whether foreign trade considerations were behind significant portion of FDI inflows especially in 1998-99. The share of FDI originating in highly developed OECD economies fell to 56 percent and 50 percent of total annual inflows in this 23 See Blonigen (2001) for a literature review.