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development. It marks moving to a new division of labor based on production fragmentation. As the experience from other countries indicates, foreign investments are crucial to overcome this barrier. The link between the FDI and network trade seems to be ubiquitous for ‘producer-driven’ network trade. Two largest recipients of FDI—the Czech Republic and Hungary—have been also the best performers in ‘producer-driven’ network exports. On the other hand, although participation in furniture or clothing global chains does not necessarily require foreign investments, it is often associated with FDI. A good example is Romania’s clothing sector, characterized by much higher foreign penetration than in other CEECs (Hunya 2002, p. 391). A large number of small Italian firms appear to dominate both clothing and leather industries in Romania (Kaminski, Ng 2004).

This section examines Bulgaria’s place in evolving division of labor driven regionally by EU Eastern Enlargement Project. It assesses participation of Bulgarian firms in global chains organized around the EU-15 but also increasingly encompassing some recent EU entrants, mainly Hungary and to a lesser extent the Czech Republic that are becoming regional intermediaries in ‘producer-driven’ networks (Kaminski 2005).

# **A** _. Participation in ‘buyer-driven’ value chains: clothing, footwear and furniture_

Clothing and, to a lesser extent, footwear have been the quintessential engines of growth for many CEEC-10 during the initial stages of transition. They have accounted for a significant share of value added and manufacturing employment, with consequential implications for poverty reduction. With increasing wages in successful reformers, many of outward processing operations in the clothing sector have been shifting to economies less advanced in the transformation process to take advantage of lower labor costs in to other countries in Central and South East Europe through the 1990s. The dates when their share in exports of manufactures peaked indicates the end of TC operations as engines of export growth. For Bulgaria and Romania as well as other SEE-4 economies, their share peaked only in the second half of the 1990s and early 2000s (Table 27). In all of them, exports of other manufactures have begun outpacing TC exports.

**Table 27:** _Share of clothing in exports of manufactured goods excluding chemicals in 1992-2002 (in percent)_

||Peak<br> year|Share in<br>peakyear|Share in 2003<br>or latest available|Index, 2003<br>peak=100|Average annual growth rate<br>1996-2003|
|---|---|---|---|---|---|
|Hungary|1992|21.2|4.1|20|3.8|
|Slovenia|1993|13.8|3.5|25|-7.5|
|Poland|1993|18.9|5.2|27|-1.9|
|Czech Republic|1994|3.8|1.8|46|2.2|
|Estonia|1995|14.1|7.3|52|8.4|
|Slovak Republic|1997|7.3|3.9|54|14.7|
|Croatia|1997|25.8|15.5|60|-0.9|
|Albania|1998|48.5|41.1|85|17.2|
|Serbia & Montenegro|1998|18.7|14.5|78|-4.4|
|Latvia|1999|20.4|16.0|78|9.7|
|Lithuania|1999|27.7|16.6|60|12.0|
|Romania|1999|32.8|29.8|91|18.5|
|Macedonia|2002|46.4|44.9|97|7.3|
|**Bulgaria**|**2002**|**34.8**|**34.0**|**98**|**21.2**|

Source: Own calculations based on national trade statistics reported to the UN COMTRADE database.

Bulgaria became part of TC value chains much later than other CEEC-10, but it has caught up very quickly. Since 1996 Bulgaria has been very successful in tapping opportunities offered by outward processing mostly by EU firms of garments. With the average annual rate of growth of 21 percent, it recorded the fastest growth over 1996-2003 among CEEC-10 and SEE-4