-  48  -

strong potential for exports.

**Table 37:** _Share of Gross Domestic and Foreign Direct Investment in GDP in 1998-2003 (in percent)_

||1998|1999|2000|2001|2002|2003|Average 2000-03|
|---|---|---|---|---|---|---|---|
|Gross Domestic Investment|16.9|17.9|18.3|20.7|19.8|21.7|20.1|
|Foreign DirectInvestment ,net|4.2|6.2|8.0|5.9|5.8|10.4|7.5|
|of which: manufacturing|1.4|3.3|1.4|1.8|0.5|1.9|1.4|
|Share of FDI in Gross Domestic Investment|25.0|34.8|43.9|28.4|29.0|47.8|37.3|

Source: BNB and WB staff calculations.

Last but not least, while we do not have data that would allow linking exports with companies according to their ownership, there is anecdotal evidence suggesting that FDI have been responsible for recent changes in Bulgaria’s export mix.

# **B** **_._** _Lesson from other transition economies: reason for optimism with a caveat_

The experience of CEEC economies provides strong support to this observation. All these economies share at least one characteristic—they all have been well endowed in skilled labor force. So has been Bulgaria. But its export pattern of factor content intensities was different, with unskilled labor intensive products towering other products since 1997. While expansion in exports of unskilled labor intensive products has characterized the adjustment in foreign trade flows following the implementation of stabilization-cum-transformation programs in other CEEC economies, subsequently, however, the gap between endowment in skilled labor and its absence in exported goods was closed. FDI flows have played critical role in it.

Indeed, exports from transition economies with higher cumulative inflows of FDI per capita tend to have larger share of manufactures in total exports and are part of flows within EUbased production and distribution networks. The value of correlation coefficient between cumulative FDI per capita and the share of manufactures in exports of CEEC-11 and SEE-5 is positive and high at 79.4 percent. Furthermore, their exports are more oriented towards skilled labor and capital intensive products. Again the share of these products in manufactured exports grows as cumulative FDI per capita increases, with the correlation of 79.1 percent. Similarly high correlation is between the level of FDI stock per capita and the participation of domestic companies in ‘producer-driven’ global networks. This comes as no surprise, as production in supply chains of these networks is both capital and skilled labor intensive.

The experience of other transition economies point not to one but two lessons. The first is that FDI flows into Bulgaria will be contributing to closing of the gap in factor content. The second lesson is the critical importance of sustaining structural reform effort (Kaminski 2005).

# **C** **_._** _Signs of change?_

Hence, if the experience of other transition economies is relevant, and there is no reason to argue otherwise, then one may expect significant increase in FDI-driven exports in the coming years, if not already in 2004-05. Inflows over 2000-03, amounting on average to almost 8 percent of the GDP, were large by any standards, albeit lower than into Czech Republic and Slovakia in the same period (see Table 35 above).

In fact, even though the share of FDI going directly to manufacturing in total FDI fell from 46 percent in 1998-99 to 20 percent in 2000-03, this should not suggest that they will have little impact on Bulgaria’s trade. For starters, consider that the origins of these inflows in 1998-99 raise concern as to their quality. Second, note that these flows accounted on average for almost 2 percent of the GDP in that period. These are significant amounts similar in terms of GDP as those that went to Hungary or Poland in the 1990s. In both countries, export response came three-four years after they reached these levels.