Perhaps the most important economic reform that Bulgaria should undertake—yet one that receives far too little attention or is discussed only superficially—is the need for a new investment strategy and substantial amendments to the Investment Promotion Act.
The key reforms to both the strategy and the legislation should focus on several priorities. First and foremost, Bulgaria should significantly increase direct financial incentives for both domestic and foreign investors undertaking export-oriented, medium- and high-technology investments.
These financial incentives should be fully aligned with the European Union's regional state aid framework, which allows up to 50% of an investment project to be financed through public support in less-developed regions. In Bulgaria, this applies to every region except Sofia and the South-West Planning Region.
Equally important is ensuring that both the eligibility criteria and the level of financial support are determined through clear, objective, and transparent rules. Such an approach would encourage investments that:
As part of the reform, the investment thresholds required to qualify for incentives should also be lowered and simplified.
This reform is essential if Bulgaria wishes to accelerate economic growth, avoid falling into the so-called middle-income trap, reduce regional economic disparities, and achieve average European income levels—even for workers with lower qualifications, who unfortunately still make up a significant share of the country's workforce.
The urgency of these reforms stems from the fact that nearly every country in Central and Eastern Europe already offers substantial incentives to domestic and foreign investors. As a result, Bulgaria finds itself at a significant competitive disadvantage when competing for major investment projects and seeking to become an integral part of global supply chains.
In a recent Financial Times article titled "Eastern Europe's Forgotten Economic Miracle," author Ruchir Sharmahighlights the remarkable economic progress achieved by the countries of Central and Eastern Europe since the beginning of their transition to market economies.
Today, the Czech Republic, Slovenia, Slovakia, Estonia, Latvia, and Lithuania are all considered advanced economies rather than developing countries, with GDP per capita exceeding USD 17,000. Poland, Hungary, and Romania are expected to join this group soon. By comparison, the last country to enter the club of advanced economies before them was South Korea in 1997.
The foundation of this economic success has been the establishment of new export-oriented manufacturing facilities, which have significantly increased exports, productivity, and wages. These new production capacities have largely resulted from major foreign investments that have successfully integrated these countries into global supply chains.
Investment promotion is therefore an effective instrument not only for attracting capital but also for achieving broader economic objectives, including:
Bulgaria continues to lag considerably behind not only the countries of Central Europe but also neighboring Romania and Serbia in attracting export-oriented, high value-added investments.
With GDP per capita of approximately EUR 10,000, low unemployment, but a high proportion of workers employed in low value-added sectors with relatively low wages, Bulgaria faces a genuine risk of becoming trapped in the middle-income trap, making it increasingly difficult to catch up with the rest of Central and Eastern Europe in the foreseeable future.
If you are a Bulgarian manufacturer considering building a new factory in Vidin, but you discover that by locating it just across the border in Calafat, Romania, you could receive a subsidy of up to 50% of your investment, along with land in a fully developed industrial park—instead of simply being promised that the Bulgarian government will build the necessary road infrastructure—would patriotism alone be enough to keep your investment in Bulgaria?
And if you were a foreign investor choosing between the two locations, which one would you choose?
The fact that Bulgaria is not an attractive destination for foreign manufacturing investment should be evident to anyone familiar with the statistics. New factory projects in Bulgaria are few and far between, and even when they do occur, they are generally relatively small-scale operations with only a moderate level of added value.
By comparison, neighboring Serbia has attracted several major investment projects exceeding EUR 100 million, as well as several projects worth more than EUR 1 billion, in addition to numerous smaller investments. The difference is equally apparent at the macroeconomic level. Comparisons with countries such as Poland, Hungary, and Slovakia are even more striking, given the multi-billion-euro investments these countries have secured in automotive manufacturing and, more recently, electric vehicle battery production.
Table 1: Growth in FDI Inflows to Bulgaria, Romania, and Serbia (2015–2019)
Source: World Development Indicators; authors' calculations.
Table 2: Landmark Investment Projects Announced or Under Construction in Central and Eastern Europe (2020–2021)
There are numerous factors that influence a company's decision when selecting a location for a new manufacturing plant, service center, or research and development facility.
Unfortunately, the global competition for investment is extremely intense, with investors often holding a much stronger negotiating position than the countries seeking to attract them. Companies such as Volkswagen—and many smaller firms as well—typically invite several countries to compete for a single investment project, rather than competing among themselves for investment opportunities.
When evaluating potential locations, investors consider a wide range of factors, including:
Naturally, the overall institutional environment and the effectiveness of the judicial system are also important considerations. However, in many cases, these factors are outweighed by the project's overall economic viability.
Unfortunately, Bulgaria performs poorly across almost all of these criteria. Even its relatively low labor costs are no longer a significant competitive advantage when weighed against higher transportation costs to Western Europe, lower labor productivity, and industrial land and construction costs that are broadly comparable to those in Central Europe.
One of the most important—and often the single most decisive—factors in choosing an investment destination is the availability of direct financial incentives.
One of Bulgaria's greatest competitive disadvantages in attracting investment is its inadequate policy on regional state aid. Unless this shortcoming is addressed, Bulgaria has little chance of attracting significant foreign investors.
For comparison, the average regional state aid granted to investors in countries such as the Czech Republic, Slovakia, Hungary, Serbia, and Romania ranges between 15% and 45% of the investment value. In Bulgaria, however, it amounts to less than 3%.
This is despite the fact that EU state aid rules permit support of up to 50% of eligible investment costs in less-developed regions—which, in Bulgaria, includes every region except Sofia and the South-West Planning Region.
Romania, for example, allows both domestic and foreign investors to receive up to 50% regional state aid, provided that the investment ultimately generates sufficient tax revenues to repay the public support over time. Between 2015 and 2020, the average level of aid granted to investment projects in Romania was approximately 45%.
Furthermore, most countries in the region have significantly lower minimum investment thresholds for qualifying for incentives, enabling them to attract a much larger number of smaller but highly innovative investment projects. In Poland, for example, the minimum investment threshold for innovative projects is just EUR 1 million.
By contrast, the main incentives currently available under Bulgaria's Investment Promotion Act for Class A and Class B investments—such as government-funded infrastructure and partial reimbursement of social security contributions—are simply inadequate and uncompetitive.
To ensure that investment incentives provided through regional state aid are both fair and legally sound, they should be based on several fundamental principles:
The following table presents a proposal for an objective points-based system for determining the level of direct financial support for manufacturing investments.
Its purpose is to encourage investments that:
The proposed evaluation framework should also be accompanied by simplified and lower qualification thresholds for investors:
The proposal also envisions classifying Bulgarian regions according to their overall level of development. Unlike the current legislation, this classification should consider not only unemployment rates but also average wage levels.
This is particularly important in the context of the middle-income trap and the almost paradoxical situation in which Blagoevgrad—a city connected to a motorway, located close to the Port of Thessaloniki, home to two universities, and characterized by low unemployment—has become the region with the lowest average wages in Bulgaria, surpassing even the traditionally less-developed regions of Northwestern Bulgaria.
As under the current system, incentives should continue to focus primarily on medium- and high-technology industries as defined by the European NACE classification. However, projects in low-technology industries could also be considered where they include a significant innovation component.
Table 3: Proposed Points-Based Evaluation System for Industrial Investment Projects
Under this proposed system, consider an investor planning to invest EUR 50 million in an export-oriented manufacturing facility in Vidin.
If the project:
it would qualify for up to 50% state aid, representing the maximum level permitted under EU rules.
By contrast, if the same investor chose to locate the factory near Sofia, within an existing industrial park, paid wages at or below the regional average, and introduced no significant innovation compared to existing production in the area, the project would qualify for only 15% state aid.
Importantly, even in the second scenario, public support would still be justified if it enables Bulgaria to attract the investment instead of losing it to neighboring countries. However, the proposed system provides additional incentives for investors to choose locations where their projects would generate a substantially greater economic impact.
It should also be noted that Bulgaria already allocates an annual budget for investment promotion. However, the available funding is insufficient and is distributed without clear priorities or transparent evaluation criteria.
Under the current Investment Promotion Act, only Priority Investment Projects—generally those exceeding EUR 50 million, or EUR 15 million under certain exceptions—are eligible for direct financial support.
In reality, projects of this scale are relatively rare. Even in countries such as the Czech Republic, the majority of supported investments fall well below these thresholds.
Table 4: Supported Investment Projects in the Czech Republic (1998–2020)
At the same time, Bulgaria's current legislation primarily supports smaller investment projects through the construction of infrastructure. This approach is inadequate, as most neighboring countries already offer fully developed industrial parks with the necessary infrastructure in place.
As with any public policy, the idea of providing state aid to encourage investment has its critics. The most common arguments are outlined below.
The purpose of regional state aid is to stimulate new investment in underdeveloped regions where market forces alone are insufficient to generate satisfactory economic development. For precisely this reason, the European Union permits regional aid with an intensity of up to 50% in less-developed regions.
Ironically, countries such as Slovakia have successfully turned state aid for major investment projects into a competitive advantage, enabling them to attract world-class manufacturers including Hyundai, Kia, Jaguar Land Rover, and many others.
Regional state aid is a policy instrument actively used throughout Central and Eastern Europe, primarily to attract export-oriented companies that serve international rather than domestic markets.
As a result, Bulgarian consumers already purchase goods and services produced by companies that have benefited from investment incentives in other countries. In other words, the competitive distortion exists regardless of whether Bulgaria itself provides regional state aid. Refusing to offer comparable incentives simply places the country at a disadvantage.
Regional state aid is repaid both directly and indirectly.
Directly, the government recovers its investment through the taxes and social security contributions paid by supported companies and their employees.
Indirectly, additional revenues are generated through suppliers serving those companies, higher household consumption, and increased tax receipts across the wider economy.
When support is targeted at high value-added industries, the payback period is even shorter. In virtually all cases, the initial public investment can be recovered within ten years.
Regional state aid is granted only in regions and sectors that cannot attract sufficient investment under normal market conditions. Its objective is therefore not to distort competition but to address structural regional disparities.
Some degree of competition is nevertheless possible—for example, when supported companies recruit employees from existing businesses. However, because the proposed policy focuses primarily on high-technology industries, these new jobs generally require higher qualifications, improve labour productivity, and contribute to higher average wages across the economy.
The persistently low level of foreign direct investment in Bulgaria over the past decade, together with the country's relatively low GDP per capita and wage levels, clearly demonstrates that Bulgaria is not currently an attractive destination for foreign investment.
Regional state aid is therefore essential if Bulgaria is to overcome its structural disadvantages, compete successfully with neighbouring countries, and attract investments in industries that generate high added value.
State aid, as part of a broader industrial policy, has played a key role in the economic success of countries such as Singapore and Ireland, long before similar policies became widespread in Central and Eastern Europe.
Comparable approaches have also been adopted by developed economies such as the United States and Germany. Examples include the incentive packages offered by American cities in the competition to host Amazon's second headquarters and the support provided by the German government for Tesla's Gigafactory near Berlin.
Attracting investment requires far more than financial incentives alone.
Reforms in education, healthcare, and the judicial system; investments in infrastructure and industrial parks; targeted international investment promotion; strengthening Bulgaria's national image; and simplifying administrative procedures all play an important role in making the country a more attractive investment destination.
Nevertheless, active investment promotion policies are an indispensable part of this broader strategy. Without competitive and transparent incentives, Bulgaria has little chance of attracting either domestic or foreign investors in higher value-added industries. Such investments are essential if the country is to increase productivity, raise living standards, and ultimately join the ranks of Europe's most prosperous economies within the foreseeable future.
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