Country Risk And Its Impact On Foreign Direct Investment Decision Making Process: A Bulgarian Perspective

Abstract

This paper examines the impact of country risk on Foreign Direct Investment /FDI/ inflows in Bulgaria. The paper attempts to answer the question: How important is  country risk and to what degree it may impact foreign investment decisions? Based on a comprehensive analysis of the FDI inflows in Bulgaria for the period 1992 – 2006 the paper provides evidence that foreign direct investment is of crucial importance to the process of transition from a planned to a market economy for the Central and Eastern European (CEE) countries in the global marketplace. Using the data from a survey of 132 foreign companies invested in Bulgaria during that period, we evaluate the specific impact of different country risk components on the FDI decision-making process from a Bulgarian perspective. Factors such as type of investment, cost of entry mode, opportunities and risks arising from the investment and overall business climate play a decisive role in the company’s strategy to enter a foreign country. In support of similar studies, we find that market size, low skilled labor cost, avoidance of trade barriers, geographical proximity, and prospects for market growth are the most important incentives for FDI in Bulgaria. What is more, the paper explores the specific obstacles that foreign investors and foreign MNEs face during the establishment of their FDI projects in a transition economy, such as Bulgaria.