bulgaria political risk mediation mncs

Strategies for political risk mediation by international firms intransition economies: the case of Bulgaria

Elena Iankova*, Jan KatzJohnson Graduate School of Management, Cornell University, Ithaca, NY, USA

Abstract

As foreign investors have entered the transition economies of central and eastern Europe, they have had to deal with

significant political turbulence and ambiguity. To create an environment that is more amenable to their businesses, the investors

have pursued political risk management strategies. An analysis of those strategies in Bulgaria was undertaken on the basis of in-

depth case-study research of American Standard, Metro Cash&Carry, and the Bulgarian International Business Association

(BIBA), which represents many international firms in regard to political risk management in Bulgaria. The analysis shows that

companies are pursuing two strategies—a low involvement strategy, in which companies, often working as part of a consortium,

devote limited resources to mediation of a narrow set of political concerns, and a high involvement strategy, in which companies

develop a diverse network of government, business, and public partners who can help them to mediate the political environment

broadly. Investment intensity, a possible explanation of the different choice of strategy is considered.

# 2003 Elsevier Inc. All rights reserved.

1. Foreign investors and political risks intransition economies

Though the transition economies in Eastern Eur-

ope have opened to foreign investment, few have

implemented political, legal, and regulatory systems

that provide a comfortable and predictable business

environment. While political factors are not the sole

determinants of investment decisions of multina-

tional corporations (MNCs), they are a serious con-

cern because of the potential impact on profitability

(Aharoni, 1996).

Political risks arise from both governmental and

societal sources (Ting, 1988: 16). Governmental

risk concerns the chance that official government deci-

sions and activities adversely affect capital or profits

(Fatehi-Seden & Safizadeh, 1989; Formica, 1996;

Kobrin, 1979; Robock, 1971; Schmidt, 1986). Govern-

mental risk can be extreme, as with confiscation and

nationalization, or it can have temporary or more

marginal effects as with exchange controls, local con-

tent regulations, etc. (Monti-Belkaoui & Riahi-Belk-

aoui, 1998; Kennedy, 1988). Governmental risks can

also indirectly affect business by creating a problematic

environment, as when bribery and corruption are com-

mon. Societal risk arises from the political action of

non-governmental organizations. Examples include

violence, revolutions, coup d’etats, civil wars, ethnic

or religious conflicts, terrorism and civic disobedience,

strikes, national boycotts of firms, and other forms of

industrial protest (Ting, 1988: 14). Even in a country

with relatively mature political institutions and public

interest groups, the political environment is complex

(Coplin & O’Leary, 1976). In a transition economy,

where institutions are still developing, the spectrum of

potential risks is even wider.

Journal of World Business 38 (2003) 182–203

* Corresponding author.

E-mail addresses: [email protected] (E. Iankova),

[email protected] (J. Katz).

1090-9516/$ – see front matter # 2003 Elsevier Inc. All rights reserved.

doi:10.1016/S1090-9516(03)00018-X

To deal with the political turbulence and ambigu-

ity, foreign investors therefore develop political risk

assessment and management strategies. The diversity

of potential political risks and differences in com-

pany exposure to risk make selection of an appro-

priate political risk management strategy complex.

Have companies pursued different strategies to man-

age the highly complex political environment and

if so, why?

2. Determinants of political risk managementstrategies

Further complexity in the political risk equation

exists because varying corporate entry strategies and

industries cause different political risk exposures. As a

result, the political risk management objectives of

firms can be very different. Some firms have minimal

asset exposure—either because they operate solely as

distributors, with rented space, short-term contracts,

and imported goods or because their assets are insured

by guarantees abroad. If those firms are in relatively

low-profile industries, they may operate easily with

minimal political risk exposure and so, little consid-

eration of political risk management. Other firms have

very extensive exposure. Some make long-term

investments in production facilities and source pro-

ducts locally; they establish elaborate distribution

systems and advertise to increase consumer awareness

of their products. For some firms, risk exposure may

even exceed loss of local assets or loss of local sales if

operations are integrated with those of other countries.

Companies with internationally integrated production

systems, for example, risk disruption of business

worldwide if one manufacturing plant is lost. For

those firms, exposure to political risk is more obvious

as is the need to manage that exposure.

The selection of optimal political risk strategies

becomes difficult both because of the variation across

political environments and because firms vary in their

exposure to those environments. Given the complexity

of both the political environment in transition econo-

mies and the variance in the exposure of investing

firms, we could imagine different strategies for poli-

tical risk mediation to arise. According to Gladwin and

Walter (1980) firms should vary in the amount of

resources they should be willing to devote to political

risk management depending on their risk exposure.

Those that have limited exposure should seek low cost

strategies and those with more extensive exposure

should choose more resource-intensive strategies.

The link between political risk exposure and poli-

tical risk strategy can be seen as a specific case of the

resource dependency framework (Pfeffer & Salancik,

1978). That framework posits a link between environ-

mental dependence and the need for the organization

to develop means to effect a better corporate-environ-

ment fit. The greater the impact of other organizations

or environmental conditions on the corporation, the

more significant its need to ameliorate environmental

effects. That can be done through the creation of inter-

organizational ties that provide competitive advan-

tages or eliminate potential threats or by efforts to

change the environment to make it more amenable to

corporate needs, by direct or indirect lobbying, for

instance. Typically the resource dependency frame-

work is used to address marketing and strategic issues,

but the concept applies equally well to the political

risk environment. In that context, firms with relatively

limited political risk exposure can choose a low

involvement strategy that includes little interchange

with the environment. Firms with extensive exposure

can choose a high involvement strategy that includes

substantial interaction with other actors and the envir-

onment (see Box 1).

Box 1. Low involvement strategy and high involvement strategy

Low involvement strategy High involvement strategy

Conditions for selection

Limited investment (assets at risk) Significant investment

Narrow political risk concerns (e.g., only

trade regulations or financial legislation)

Wide political risk concerns (market, trade,

employment, financial, etc. issues are all relevant)

E. Iankova, J. Katz / Journal of World Business 38 (2003) 182–203 183

3. Types of political risk management strategies

3.1. Low involvement strategy

There are a number of alternatives for low-cost

risk management, including reducing costs by link-

ing with other organizations that have similar goals

in trying to avoid political entanglement altogether.

The former uses the common strategy of gaining

scale economy to achieve cost reduction. In this case,

firms with similar objectives form coalitions to gain

scale in information gathering and action. Several

scholars have pointed out that joint venture partners

are a common method of expanding political risk

management capabilities (Bradley, 1977; Delios &

Henisz, 2000; Hennart, 1988; Teece, 1992). For

wholly-owned operations, coalitions with other simi-

lar-interest companies can be formed (Coplin &

O’Leary, 1976). For example, firms interested in

decreasing import tariffs might join together to share

the costs of a lobbying strategy rather than each

making the effort independently. The low resource

strategy leads firms to simply avoid the appearance of

political activity (Gladwin & Walter, 1980) in the

hope that they may not be the target of political

action. That strategy is only viable if a firm does not

want to effect change in the political system. The

common theme of both strategies is that they are low

involvement for the firm, requiring few resources for

their execution.

The less resource-intense choice, the low involve-

ment corporate strategy, mediates political risk

through a coalition of similar companies, all with

similar expertise and objectives and all acting with

a single voice. Firms pay an annual membership fee

and managers may choose to act on various coalition

committees that develop position papers and interact

with high-level government bureaucrats and parlia-

ment members. Its focus is national level policy, where

the coalition hopes to create a regulatory and legal

framework that benefits business. Companies involved

in this strategy expend few resources, but have poten-

tial for return only in regard to general business issues,

such as national tax policy or labor law revision. Firms

with limited political risk exposure, for example

because they have less equity in the market (as with

trading firms) or because their equity investments are

guaranteed outside of the market (as with many banks)

are likely to pursue this less resource-intense corpo-

rate strategy.

3.2. High involvement strategy

Companies with high political risk exposure, how-

ever, should be willing to expend greater resources and

develop a more elaborate strategy because they can

expect to affect the political environment in ways that

provide adequate return on their efforts. The idea of a

network is still appealing, but instead of a coalition of

similar parties to gain scale, this network would be of

Little risk of spillover effects to other

markets if situation worsens

High risk of spillover effects if situation worsens

(e.g., loss of supply from manufacturing facility will

affect sales elsewhere)

Characteristics of strategy

Mediates political risk through a coalition of

similar companies

Mediates political risk through a coalition of local

stakeholders (e.g., unions, community organizations,

local government), in which political, social and

economic actors are drawn into a network

Focus on national level policy (government

bureaucrats and parliament members)

Political influence at varying levels by combining the

political resources of local and national organizations

Constantly active, developing position papers

and interacting with government and

parliament officials

Works intermittently, being activated when a relevant

political issue comes to the fore

Hopes to create a regulatory and legal

framework that benefits business

Hopes to create a more stable political environment

in general

184 E. Iankova, J. Katz / Journal of World Business 38 (2003) 182–203

diverse parties to gain scope. Consumer groups, labor

unions, creditors, environmental and other public inter-

est groups, government agencies, etc. are all potential

network members (Coplin & O’Leary, 1976; Delaney

et al., 1999; McCahery & Vermeulen, 2001; Vogel,

1978). The high involvement strategy thus creates a

network of local, regional, and national stakeholders,

including political, social and economic actors.

Through frequent contact and communication, the

network acts as an information gathering device and a

mechanism to work with potential sources of political

risk to reduce the likelihood of actions in conflict with

company objectives. When these groups’ goals are

aligned with the firm, they can supply diverse infor-

mation leading to better management decisions and

use their diverse contacts to make the environment

more amenable to the firm. Even when those groups

are not aligned with firm objectives, maintaining

communication within the high involvement network

allows firms to better predict risks and negotiate

settlements that reduce the impact of political actions

(Gladwin & Walter, 1980). This strategy provides

opportunities for political influence at varying levels

and in regard to a wide variety of issues, with sub-

stantially greater sensitivity to the specific needs of the

firm. Further, it can address political problems that

cannot be solved through changes in the regulatory

framework, for example civil unrest.

These strategies are not mutually exclusive; a firm

can choose to participate in both. The limited-resource

and the high involvement strategy are actually two

sides of a spectrum with firms able to move incre-

mentally throughout the range. Firms that have devel-

oped high involvement networks may agree to

participate in low involvement consortium because

they see those as simply another node in their network.

In addition, firms can transition from the low involve-

ment to the high involvement strategy as their level of

involvement in or sophistication regarding an envir-

onment increases. A firm devoting very limited

resources to political risk management may thus

develop a link to a community organization or a direct

link to a government agency and begin to slide toward

the high involvement strategy.

In general, though, we would not expect a low risk

exposure firm to choose a high involvement strategy

because of its high resource cost. Also, high exposure

firms may not choose to participate in low involve-

ment strategies because they may pursue different

objectives. For example, a large number of importers

involved in a corporate coalition encourages focus on

lowering import tariffs, even in exchange for the

creation of other taxes, such as export fees or higher

corporate tax rates. A foreign company that has

invested in local manufacturing, particularly if the

output is in part destined for export markets, would

be unlikely to support those political objectives.

Furthermore, there is evidence that firms select

across those based on the extent of resource commit-

ment to the market—foreign firms with substantial

long-term equity commitments in the market including

manufacturing, distribution, and sales activities would

likely choose the broad-resource-intensive strategy.

Other firms, particularly those with limited exposure,

choose a more focused-low-cost strategy.

4. Methodology

To illustrate the two political risk management

strategies, we will examine the emerging business

networks in Bulgaria, a transition economy in south-

eastern Europe. The focus on Bulgaria, which is in an

early stage regarding foreign investment, allows us to

identify the initial development of foreign investors’

political risk strategies and ascertain the reasons for

divergent strategic choices.

Bulgaria is also a good case because it provides

insight into the type of turbulent economy that is the

destination of much new investment. Historically,

investment in turbulent countries was limited to a

few industries—extraction, construction, and some

lending. Recently, there has been a broadening of

investment as firms sought low wage manufacturing

sites, consumer products companies expanded beyond

traditional mature markets, and service firms, such as

consultants, rushed in to support the other invest-

ments. Between 1990 and 2000, the stock of foreign

direct investment (FDI) in the least developed nations

rose more than fourfold, from $8.3 billion to $34.9

billion (UNCTAD, 2002). With the opening of mar-

kets in Eastern Europe, FDI stocks in that region rose

from $3 billion to $124.7 billion during the same

period (UNCTAD, 2002).

A look at political risk management strategies in

Bulgaria suggests that firms have chosen to pursue


various combinations of strategic paths for political

risk mediation. We have done two in-depth case

studies in Bulgaria. The first describes Metro Cash&-

Carry’s activities through the Bulgarian International

Business Association (BIBA), and illustrates the low

involvement strategy. Though there are some manu-

facturers that belong to BIBA, membership is pri-

marily comprised of large trading and service firms,

which have lower political risk exposure, despite the

fact, as will be noted below, that 55% of foreign

investment is in manufacturing. The second case

study describes American Standard’s linkages with

several government and public groups to manage its

complex political environment. It illustrates the high

involvement strategy, which is appropriate for Amer-

ican Standard’s extensive investment in Bulgaria.

The two companies highlighted in the cases here,

simply illustrate close approximations of the two

ends of the spectrum with one firm, Metro Cash&-

Carry pursuing a very limited-resource strategy and

American Standard illustrating use of a high involve-

ment network.

The Metro Cash&Carry case is based on several

visits to one of the Sofia stores, and an interview with

the company’s executive director E. Abadjiev. Addi-

tional information was gathered through the com-

pany’s Internet resources. Extensive interviews were

also conducted with the BIBA leadership—its two

executive secretaries since 1999, I. Derilova and N.

Babev. The BIBA secretariat also provided all the

necessary information on its activities, including

copies of the annual White Papers and the government

response to them, where available.

Our case study on American Standard is based on

several visits to American Standard’s subsidiary in

Bulgaria, Vidima, starting from July 1999. Interviews

were conducted with the executive director of the

company, V. Kanev, and several other representatives

of the management. Archival and current economic

data available from American Standard was used as

well. Interviews were held with the Mayor of Sevlievo

Y. Yovkov as well, to examine the extent of local

community outreach of the company. Analysis of all

reports on American Standard that appeared in the

Bulgarian media since the entry of the company in

Bulgaria was also conducted. Interviews with BIBA

representative regarding American Standard were also

included in the methodology.

As background for the political risk strategy argu-

ment, the foreign investment situation in the country is

first described. That will be followed by an analysis of

the political risk management strategies of the two

firms and on multi-firm organization in Bulgaria, as

mentioned above, and a discussion as to why various

strategies were selected. The final section of the paper

discusses conclusions and managerial implications

adequate for foreign investors operating in the transi-

tion economies of central and eastern Europe.

5. The foreign investment situation in Bulgaria

Since it began its transition in 1989, Bulgaria has

attempted to move to a market economy and meet the

criteria for EU membership through the use of foreign

aid and capital investment to overcome domestic

crises. To this point, capital inflows have not been

adequate to reach the national objectives. Although

the country was not directly involved in the Balkan

conflicts of the 1990s, its economy and emerging

businesses suffered the consequences of political

instability in the region, causing reduced investor

confidence, postponement of needed structural

reforms, and general economic malaise. In addition,

Bulgaria still lacks political and legal transparency

and suffers from too much corruption, making the

country unattractive to many foreign investors.

Compared to other central and eastern European

applicants for EU membership, Bulgaria occupies the

last but one place (before Romania) in terms of GDP

per capita—6,500 Euro in 2001, compared with the

frontrunners Slovenia (16,000 Euro), the Czech

Republic (13,300 Euro) and Hungary (11,900 Euro).

Accordingly, its GDP per capita as a percentage of the

EU average is also one of the lowest (second after

Romania’s)—28, compared with Slovenia’s 69, the

Czech Republic’s 57 and Hungary’s 51 (see Table 1).

Bulgaria is also at the bottom in terms of FDI—a total

of 1.15 billion Euro by the end of 1998, only 138 Euro

of FDI per capita. At the same time Hungary, the

frontrunner in terms of FDI inflows, was able to attract

14.9 billion Euro of FDI, or 1,473 Euro per capita for

the same period (see Table 2) (European Commission,

1999: 42–43).

Investment of external capital significantly lags

domestic investment. The share of FDI in the overall


investment process in the country—3.3% of GDP in

1998 and 6.1% in 1999 has been far behind the level

of domestic investment (15.1% and 17.1% for the

same years) (CSD, 2001). Despite the absence of

significant wealth domestically, local businesses

still invest more in business growth than do foreign-

ers, further indicating how unattractive the market

appears to be to foreign firms. Despite the low

investment numbers, the last decade has seen several

major multinational companies establish subsidiaries

in Bulgaria—American Standard, Shell, Danone,

Nestle, METRO and others. FDI came through

both privatization and greenfield investments (see

Table 3).

Thirty-two percent of the total foreign investment

into Bulgaria is accounted for by privatization deals.

The number could have been higher, but foreign

investors have shown little interest in the big debt-

ridden flagships of the socialist economy. Some of

those were sold for 1 BG Lev (approximately U.S.$

0.50) plus assumption of debt and guarantees of new

investment. It does not appear that privatization will

play a much greater role as a channel for FDI inflows

because there is little left to privatize. By 2000, more

Table 1

Macroeconomic indicators for CEE countries (2001)

Country Population

(millions) 2001

GDP Euro billion

PPP 2001

GDP per head

Euro/PPP 2001

GDP per head as

percent of EU

average (PPP) 2001

GDP growth (%)

2001

Inflation rate (%)

2001 annual

average

Bulgaria 7.9 51.5 6,500 28 2.0 7.4

Czech Rep. 10.2 136.0 13,300 57 1.1 4.5

Estonia 1.4 13.4 9,800 42 5.2 5.6

Hungary 10.2 121.3 1,900 51 4.5 9.1

Latvia 2.4 18.1 7,700 33 6.1 2.5

Lithuania 3.5 30.3 8,700 38 3.6 1.3

Poland 38.6 355.5 9,200 40 4.2 5.3

Romania 22.4 132.2 5,900 25 �1.0 34.5

Slovakia 5.4 59.7 11,100 48 3.3 10.8 (2000)

Slovenia 2.0 31.9 16,000 69 4.2 8.6

Source: European Commission, ‘‘Towards the Enlarged Union. Strategy Paper and Report of the European Commission on the Progress

towards Accession by Each of the Candidate Countries,’’ Brussels, October 2002, pp. 96–98.

Table 2

Foreign direct investment in CEE countries, 1989–1998

Country Total FDI by

1/1/99 (Euro million)

EU share in total

FDI percent (total CEE 79%)

Total FDI per

head (Euro)

FDI in 1998

(Euro million)

FDI per head in

1998 (Euro)

Hungary 14,902 80 1,473 1,517 150

Poland 13,439 75 347 5,888 153

Czech Rep. 8,396 78 863 2,230 217

Romania 4,023 90 178 1,820 80

Slovenia 1,062 100 531 137 69

Latvia 1,413 88 565 178 71

Slovakia 1,137 82 210 223 41

Bulgaria 1,147 84 138 325 39

Estonia 1,224 62 844 504 348

Lithuania 1,394 58 376 847 229

Source: European Commission, ‘‘European Union Enlargement: A Historic Opportunity,’’ Brussels, 1999, pp. 42–43. Based on: EBRD Report

on Transition (update 1999); Report on Investment in the World (UNCTAD, 1998)—data up to 1/1/98 (including 1997). Note: Conversion of

1998 EBRD data at rate of 1 Euro ¼ $1:121 and 1997 UNCTAD data at 1 Euro ¼ $1:134.


than 76% of the assets defined for privatization have

been transferred to the private sector and the remain-

ing 400 enterprises were expected to follow in 2001.

The lack of transparency and corruption of the

Bulgarian economy can be seen in the privatization

process. Forty-eight percent of privatization deals

between 1997 and 2000 have been management-

employee buyouts (MEBOs), which are entitled to a

ten year deferred payment scheme with grace period.

Initially MEBOs were intended to provide private

investors when there was a lack of traditional investor

interest. Over time, however, MEBOs have increasingly

been used as a cover for third party interests—political/

business networks—to buy public assets inexpensively

and with little capital invested initially (CSD, 2001).

Greenfield investment has been dominated by

small- and medium-sized enterprises (SMEs), though

in the last few years, large companies have appeared,

such as the German retail chain METRO, Liebherr

(Switzerland, heavy equipment manufacturing),

BILLA (Austria/Germany, hypermarkets), American

Standard (USA, bathroom fittings). As assets for

privatization are now limited, greenfield investment

seems likely to rise further.

Germany and Belgium have been the unchallenged

leaders in FDI in Bulgaria (see Table 4). Italy has been

the second trade partner of Bulgaria but until 2000 it

was at the bottom of the list—15th. Then Unicredito

Italiano bought the largest Bulgarian bank—Bulbank,

and Italy jumped to third position making its trade and

investment presence more balanced. In terms of num-

bers of investments, 91 of the biggest 152 investors

have been companies based in the EU (CSD, 2001).

There is a 77% concentration of capital in the top 10

countries in 2001, $3,473 million.

The sectoral distribution of FDI has changed as major

privatizations overwhelm earlier patterns. Manufactur-

ing has shown consistent investment and remained in

first place among sectors since 1995. By 2001 foreign

investments in manufacturing reached $2,184 million,

almost half of total FDI. With the privatization of

Bulbank in 2000, the financial sector captured the

second investment spot, with total investment of

$830 million. Trade has attracted $704 million and

telecommunications is in fourth position with $244

million in investments (see Table 5). As noted pre-

viously, few privatizations are left after 2002 and so, we

would expect to see more consistent trends in invest-

ment by sector after that.

In its Program ‘‘People are the Wealth of Bulgaria’’

presented to parliament at the end of October 2001, the

new government of Simeon Saxecoburggotski pro-

mised to attract $1 to $1.2 billion FDI annually in

2002–2005. Foreign investment remains a key aspect

of Bulgaria’s growth model. A declared commitment

of the government is to create an environment that is

Table 3

Foreign direct investments in Bulgaria by year

Foreign direct investment inflows by years

Year Volume in USD (m) Number of employees

Privatization Othera Total by years

1992 34.4 34.4 1,715

1993 22 80.4 102.4 3,052

1994 134.2 76.7 210.9 4,269

1995 26 136.6 162.6 5,646

1996 76.4 180 256.4 6,168

1997 421.4 214.8 636.2 5,503

1998 155.8 464.2 620.0 6,226

1999 226.7 592.1 818.8 4,845

2000 366 635.5 1001.5 5,153

2001 19.2 669.3 688.5 9,089

Total 1447.7 3084.0 4531.7 51,666

Source: Bulgaria 2002 Business Guide: Legal, Tax and Accounting Aspects (Sofia: Bulgarian Foreign Investment Agency, 2002, p. 18).a Greenfield investment þ additional investment in companies with foreign participation þ reinvestment þ joint ventures 2001�—

preliminary.


friendly to Bulgarian and foreign investment and to the

balanced development of small, medium and big

business. The government declared that it would stick

to clear rules and offer incentives to local and foreign

capital while it abides to the principles of the market

economy. This suggests room for corporations to

effect a political/regulatory system that is amenable

to business needs.

6. Political challenges to foreign investors inBulgaria

Until 1997, Bulgaria did not have a clear and precise

legislation on foreign investments. In October 1997,

however, the Foreign Investment Act (FIA) brought

the legal framework for foreign investment into full

compliance with the accepted international standards

Table 4

Bulgaria: foreign direct investments by countries in USD million, 1992–2001

Source: Bulgaria 2002 Business Guide: Legal, Tax and Accounting Aspects (Sofia: Bulgarian Foreign Investment Agency, 2002, p. 18).


and created a liberal foreign investment regime by

regional standards. Under the Act, foreign and local

investors are entitled to equal treatment. No minimum

investment is required for classification under the FIA

and 100% foreign ownership is permitted, with the

exception of direct foreign ownership of land. The FIA

also provides for liberal exchange controls and does

not restrict profit and capital repatriation except where

enterprises are acquired in foreign debt-for-equity

swaps. It permits expropriation only after fair com-

pensation is paid.

Despite the institution of a liberal business envir-

onment from a regulatory standpoint, problems clearly

persist. The initial strong legacy of the planned econ-

omy (Jones & Miller, 1997; Spenner et al., 1998), and

fragile political arrangements favored the growth of

illegal economic activities (Bogdanov & Stanchev,

1997), corruption and extortion (IME, 1996; Stanchev,

1995), extensive state involvement in economic and

business activities (Bogdanov, 1998; FED, 1999; IME,

1996a; Kabakchieva & Dimitrov, 1998; Stanchev,

1999), and the possibilities of coalitions of rent-seek-

ing elite obtaining political power (Jackson, 2002).

Throughout the Bulgarian transition business issues

have been revisited frequently by governmental offi-

cials. Each change in government—nine since 1989—

saw waves of politically motivated campaigns against

company directors, often carried out with the support

of labor unions. Those campaigns led to the frequent

dismissal of top executives of state-owned enterprises,

creating turbulence in companies being readied for

privatization. Major tax laws were changed 66 times

between 1990 and 1999 with implementing rules

changed 43 times in the same period. The Personal

Income Tax Law of 1950 was changed 19 times after

1990; seven of these were in 1996–1997 (FIAS, 2000:

4). Political risk is ever present, as managers can never

be certain of the permanence of any political action.

Additional uncertainty arises because no regula-

tions or institutions exist in some business areas while

too many exist in others. Holes in the system arise as

outdated laws are eliminated before the adoption of

new laws. The Personal Income Tax Law of 1950 for

example was abolished in 1997, though a new law was

not completed in 2000 (FIAS, 2000: 4–5). On the other

hand, Bulgaria had 79 registration regimes, 119 allow-

ance regimes and 49 license regimes along with 579

regulations in 1999 (Stanchev, 1999).

This is, to a certain extent, inevitable in a country in

transition. Further, in the rush to pass new legislation

in the pursuit of EU accession requirements and

general policy reforms, implementing regulations

seem to be falling behind (FIAS, 2000: 5). Still, this

leads to a high degree of uncertainty, both for investors

and for responsible civil servants. Partially because of

the uncertainty, the administration fails to provide help

Table 5

Bulgaria: foreign direct investments by sectors in USD million, 1992–2001

Source: Bulgaria 2002 Business Guide: Legal, Tax and Accounting Aspects (Sofia: Bulgarian Foreign Investment Agency, 2002, p. 18).


in the interpretation of new legal provisions. Corpora-

tions are therefore left on their own to gather informa-

tion and determine the means of compliance.

Finally, the existing court system is seen as ineffi-

cient and not in a position to handle the caseload and

administrative tasks it is charged with. As one investor

had pointed out, going to court would be his last

choice to fight for his rights (FIAS, 2000: 5). A survey

of the judicial system in Bulgaria conducted by the

World Bank reveals several inherent weaknesses,

including understaffing, low salaries, potential corrup-

tion, insufficient training mechanisms, and overly

complex legal procedures (The World Bank, 1999).

Weak oversight and an ambiguous legal system

have resulted in the proliferation of tax violations

and the development of informal and grey economic

activities. According to official estimates, the private

sector accounted for 25% of GDP in 1994, but when

activities outside of the government tax base were

included by the International Bank for Reconstruction

and Development (IBRD), the private sector was seen

to contribute 50% of GDP. IBRD data further indicate

that at least 90% of profits in the economy accrued to

the informal private sector (UNDP, 1997).

Private sector illegalities are compounded by public

sector corruption, which is generally perceived as the

abuse of public power for private gain. Bulgarian

corruption—similar to other central and eastern Eur-

opean cases—is fostered by three major factors:

monopoly (the continuing power of the state in the

economy and other sectors of social life), excessive

discretionary power (i.e., the lack of clear adminis-

trative rules and regulations), and lack of account-

ability (i.e., poorly functioning or absent watchdog

agencies) (Elliott, 1997). Together the illegal private

systems and corrupt public system create significant

uncertainty for legitimate firms.

Several forms of corruption were identified in a 1999

survey of 130 Bulgarian businesses including 17 for-

eign firms (part of a broader World Bank survey carried

out in 20 CEE countries) (Hellman et al., 2000).

Companies reported that people bought parliamentary

votes, presidential decrees, and court decisions. Bribes

could be paid to public officials to avoid taxes and

regulations. The survey did not clarify whether pay-

ments were a corporate strategy or whether extortion

occurred. Those firms that paid bribes, frequently or

always, indicated the following distribution of bribes

for ‘‘services’’: licenses (22.6%); connection to public

services (17.7%); taxes (14.1%); courts (13.6%); cus-

toms (11.9%); health/fire inspectors (8.2%); govern-

ment contracts (6.6%); influence on legislation (2.8%);

and other (2.6%) (Hellman et al., 2000: 36).

Questionable practices that effected business indir-

ectly were also found in the survey. Respondents

reported that the Bulgarian National Bank mishandled

funds and that patronage (defined as public officials

hiring their friends and relatives to official positions)

was common (Hellman et al., 2000: 20). The survey

found though that illegality was pervasive in the busi-

ness environment of Bulgaria. To reduce the question-

able practices, the government is currently discussing a

new law on lobbying that is intended to increase

transparency and reduce the likelihood of bribery and

corruption. If this law is implemented, it will create a

major change in the business–government relations in

Bulgaria and improve conditions for foreign firms,

which tend to be less familiar with appropriate relations

or constrained legally (as with the US Foreign Corrupt

Practices Act) from participating in such relations.

Another pervasive and difficult to manage concern is

the conduct of the state in its capacity of corporate

shareholder and the resulting control over major eco-

nomic activities. The dual role of the state as a regulator

of the economy and shareholder in privately traded

companies is inevitably generating internal conflicts

and often leads to a politicizing of purely economic

issues. This often lowers corporate efficiency and

induces decisions determined by non-economic factors.

Public servants participating in company governing

bodies tend to exert a dominating and, sometimes,

unsuitable influence on managers. Important decisions,

such as election of boards, amendments of bylaws, and

management of assets, are often affected by the state

through this particular channel.

Several non-governmental organizations signifi-

cantly affect the business environment as well. The

Bulgarian Labor Code of 1986 introduced works

councils at the firm level, providing labor organiza-

tions with an impact on firm strategy. Until the col-

lapse of the Zhivkov regime in 1989, this system

actually provided only a modest degree of worker

involvement (Petkov & Thirkell, 1989). Afterward,

however, the Code was not significantly changed, and

workers and unions have become key players in the

emerging business environment.


A survey of 371 Bulgarian manufacturing establish-

ments in the period 1989–1992 carried out by Jones

(1995) reveals that, while modest in the initial years of

transition, employee involvement was clearly increas-

ing. Through their involvement in national political

talks with the government and emerging business

associations in the initial years, trade unions acquired

overwhelming employee representation powers (Thir-

kell & Tseneva, 1992). Politically motivated strikes

and other forms of industrial unrest were a frequent

phenomenon during the initial years of transition. Not

unrelated, all international financial institutions in

Bulgaria for the purpose of granting loans for eco-

nomic restructuring requested the consent of the

unions on preserving social peace during the duration

of the loan agreements (Iankova, 2002).

Business groups also have their own political

power. A survey of Bulgarian business organizations

reveals the tight link between business and political

institutions. In 1995, more than 80% of business

leaders interviewed by the Institute for Market Econ-

omy believed that ‘‘in Bulgaria a business association

should be committed to a political party, in order to

achieve its goals’’ (Bogdanov & Stanchev, 1997).

Public interest groups have also arisen and those

attempt to effect the business environment either direc-

tly or indirectly. Ekoglasnost is composed of citizens

with an interest in environmental issues, such as pollu-

tion control. Ekoglasnost was responsible for the first

public demonstrations in Bulgaria prior to 1989. Their

objective is to foster enactment of regulations suppor-

tive of a sustainable environment, which obviously

would affect manufacturing firms. Women’s groups,

groupsadvocating for thedisabled andelderly, andother

groups are being created and beginning to flex their

political muscle (Iankova, 2002). While this means that

the sources of political risk are expanding, it also means

that the range of external entities to form a political

risk management network is growing. Proper manage-

ment of the environment, while complex and costly,

can therefore provide a significant return to the firm.

7. The business perception of the politicalchallenges

In terms of determinants of FDI in Bulgaria, a 2000

survey on foreign investors in Bulgaria conducted

by KPMG1 distinguishes between three groups of

factors—factors influencing the company’s initial

investment decision; factors of significant importance

for running the company’s local operations; and cri-

tical factors for future foreign investments. While

respondents rate political risk as the seventh most

important factor influencing the companies’ initial

investment decision (Table 6) (KPMG, 2000: 17), it

is fourth most important in affect on the companies’

local operations in (Table 7) (KPMG, 2000: 18) and

most important in influencing corporate decisions

about future investments (Table 8) (KPMG, 2000: 21).

The impact of political factors on investment pat-

terns emerges even more clearly if we look at the

barriers to foreign investments in Bulgaria listed by

the surveyed companies. Four of the top five barriers

are a direct consequence of political and policy

factors: cumbersome bureaucracy (considered the

most serious problem—reported by 86% of respon-

dents), the incoherent and unstable legal system

Table 6

Factors influencing initial investment decisions in Bulgaria (KPMG

Survey 2000), in percent

1. Customer base in the region 42

2. Former business contacts 40

3. Emerging market 38

4. Strategic geographic location 36

5. Lower labor and non-labor costs 36

6. Skilled labor 26

7. Stable political environment 18

8. International competitive pressure 18

9. Good local market 17

10. Lack of competition in the country 14

11. Availability of capital equipment 13

12. Proximity to home operations 13

13. EU membership prospects 6

14. Availability of raw materials 6

15. NATO membership prospects 3

16. Tax incentives 1

18. Favorable foreign investment law 1

19. Positive regulatory environment 1

20. Funding accessibility 0.1

21. Inexpensive land 0.1

Source: KPMG. Foreign Investors in Bulgaria. Survey 2000

(KPMG: Sofia, 2000, p. 17).

1 Two hundred and thirty companies were surveyed including the

top 140 foreign direct investors identified by the Bulgarian Foreign

Investment Agency.


(75%), corruption (63%) and excessive taxation

(54%) (Table 9) (KPMG, 2000: 21). Nikolay Marinov,

Director of the Bulgarian Foreign Investment Agency,

confirms that political factors are significant obstacles

to his agency’s task of attracting foreign investment.

Bureaucratic red tape, ambiguous legislation,

and frequent changes in legislation are consistently

sited by foreign investors as problems (Standart, May

29, 2002). The political environment clearly is of

concern to foreign investors and we would therefore

expect most to make some effort to mediate political

risks.

8. The low involvement strategy: MetroCash&Carry and the BulgarianInternational Business Association

Metro Cash&Carry Bulgaria is a constituent part of

Metro AG. Based in Dusseldorf, Germany, Metro

consists of the following chains: Metro Cash&Carry

wholesale hypermarkets, Real retail hypermarkets,

Extra (a chain of smaller supermarkets in Germany),

Media-Saturn group in Metro’s electronic business,

and Praktiker, Metro’s do it yourself markets. During

the recent years, Metro has grown through take-overs

and been completely restructured. It has expanded

from being a cash and carry wholesale company to

being Germany’s largest retailer, Europe’s second

Table 7

Factors of importance for running local operations in Bulgaria

(KPMG Survey 2000), in percent

1. Skilled labor 47
















17. Funding accessibility 3



20. Inexpensive land 1


(KPMG: Sofia, 2000, p. 18).

Table 8

Factors of importance for future foreign investments in Bulgaria

(KPMG Survey 2000), in percent


2. Skilled labor 38












14. Funding accessibility 10




18. Inexpensive land 4




(KPMG: Sofia, 2000, p. 19).

Table 9

Barriers to foreign investments in Bulgaria (KPMG Survey 2000),

in percent

1. Cumbersome bureaucracy 86

2. Incoherent and unstable legal system 75

3. Limited purchasing power 68

4. Corruption 63

5. Excessive taxation 54

6. Lack of infrastructure 38

8. Lack of experienced managerial staff 32

9. High investment risk 29

10. Crime 28

11. Limited borrowing options 28

12. Technological backwardness 24

13. Inflation 12

14. Currency instability 8

15. Other 10


(KPMG: Sofia, 2000, p. 21).


largest commerce company, and, according to some

accounts, it is the second largest retailer in the world

after Walmart.

The Cash&Carry business is the core business of

Metro AG. It offers under the label of either Metro or

Makro a broad and deep food assortment with special

emphasis on fresh products and a broad non-food

assortment for general business supply to professional

customers and institutional bulk buyers. Metro’s

assortment comprises about 20,000–30,000 non-food

articles and about 10,000–15,000 food articles, always

adapted to the local demand. Cost reductions are

passed on to the customers as price advantages.

Due to its wide assortment variety Metro Cash&Carry

is able to offer its professional customers what they

need ‘‘under a single roof’’ and is therefore a flexible,

first-degree purchase source for them.

The Cash&Carry business is also by far the largest

and most international business of Metro AG. Metro

Cash&Carry wholesale hypermarkets are present in 22

countries with a total of 384 Metro and Makro markets

(in Europe, the Makro cash and carry markets belong

to Metro). Cash&Carry employed an average of

64,662 workers (full time equivalents). With over

38 billion German Marks (close to U.S.$ 20 billion)

in 2001, Metro Cash&Carry brought 44.4% of the total

Metro AG turnover.

Metro opened its first cash & carry hypermarket/

megastore in Sofia in March 1999. Metro was

expected to carry a wide variety of direct-imported

and locally produced consumer items. By 2002, Metro

had built one additional store in Sofia, and others

throughout the country, in the larger cities of Plovdiv,

Varna, Bourgas, Russe, Stara Zagora, to a total of

seven. Metro is predominantly a retailer. It does not

have its own production system, except for the pro-

duction of small amounts of barbeque meat balls for

distribution in its stores.

Each country, including Bulgaria, is managed by a

local management team. The basic management idea

is ‘‘Our customers are our partners.’’ ‘‘Our customers

pick the goods they need for themselves in the store,

pay and take away the goods in their own vehicle:

CASH & CARRY.’’ This has a number of advantages

for the customers: very favorable price/performance

level; large food and non-food assortment under one

roof; immediate availability of goods in both, large

and small quantities.

The firm discusses the political conditions in the

country on a regular basis. According to its managing

director E. Abadjiev, ‘‘we talk a lot about the political

situation in the country and discuss political risks. But

our general approach is to mind our own business and

not interfere in politics. Our business is not politics.’’

Metro’s direct outreach to the local communities is

not big, although the company considers its support

for the development of the local national economy to

be significant. ‘‘We support the development of the

economy in several ways: (1) our investment in Bul-

garia per se; (2) we create new jobs; (3) we create

opportunities for our suppliers to grow with us (these

are mostly local suppliers although some foreign are

also used)—they enter the global markets together

with Metro; (4) we create opportunities for a lot of

entrepreneurs to develop their small businesses. These

are owners of hotels, restaurants, bars . . . there is

always the option for them to find fresh food in the

Metro stores; and (5) we have participated everywhere

in the building of infrastructure accompanying our

stores in Sofia, Varna, Plovdiv, Burgas, Russe, and

Stara Zagora.’’

Metro’s aim in the area of employment relations has

been: ‘‘Friendly and well qualified employees.’’ Spe-

cial educational and training programs support this.

Labor relations at Metro have normally been correct,

although major problems have been encountered in

many countries. In 1999, at a meeting between Uni

Commerce and the responsible personnel directors of

Metro AG and all its chains, the company affirmed its

full respect for workers and trade union rights, includ-

ing the right to organize. With the support of the two

German Uni Commerce affiliates DAG and HBV, an

organizing campaign was launched in Poland, the

Czech Republic, Slovakia and Hungary. The pilot

project with Uni Commerce affiliate the Solidarity

trade union in Poland has been successful, several

new Metro trade union locals have been established,

and it is now being expanded to the other countries. The

Metro AG personnel management has intervened sev-

eral times in Poland, in favor of the right to organize.

They also participated in the European social dialogue

round table meeting in Warsaw in 1999, reiterating

their commitment to respect workers’ rights.

Metro Bulgaria does have direct contacts with

various government officials from the national gov-

ernment and local government authorities, despite its


general policy of restraint from direct involvement in

the government decision-making process. These con-

tacts were much more intensive at the time Metro

entered the country in 1999. There were meetings with

then Prime Minister Ivan Kostov, with the Minister of

Finance Muravey Radev and the deputy ministers of

finance, the Head of the Main Tax Directorate, and the

Minister of Labor.

The Law on Foreign Investments allows special

institutional help for the investors accomplishing an

investment project acknowledged by the Council of

Ministers as priority one. At the request of the inves-

tor, the Foreign Investment Agency may propose to

the Council of Ministers to form an interministerial

group, comprising representatives of ministries and

agencies concerned, in order to provide institutional

support for appointed investment projects acknowl-

edged by the Council of Ministers as priority invest-

ment projects. Based on the institutional support

mechanism, the Council of Ministers set an intermi-

nisterial group in 2000 in order to coordinate the

institutional help to the greenfield investment project

of Metro Group in Bulgaria.

Currently Metro does not hold regular meetings

with politicians. There are though direct contacts with

deputy prime minister and Minister of Economy

Nikolay Vassilev. Also, in November 2002 the CEO

of Metro AG, Dr. Hans Joachim Korber met with

Bulgarian President Georgi Parvanov during Parva-

nov’s official visit to Germany.

Metro Bulgaria became a member of the Bulgarian

International Business Association soon after its entry,

actually when the first store was opened in Sofia.

However, BIBA membership was not included in

the entry strategy of the company. The entry strategy

has been a pure strategy for a trading company.

Everywhere in the world, Metro AG aims to become

a member of representative organizations of business

in the field of trade. In this way Metro aims at

influencing the process of legislation drafting and

securing better conditions for the development of trade

and the retail sector. BIBA was perceived as such a

representative organization of business in Bulgaria

which has been visible in the country in summarizing

and formulating, representing and defending the inter-

ests of foreign investors. Overall, BIBA’s lobbying

activities and high visibility in the country are the

reason for Metro to decide to become its member.

BIBA was founded in April 1992 as a non-profit

organization bringing together many of the largest

foreign investors in the country. The founders of BIBA

were British Gas, the Bulgarian-American Enterprise

Fund, International Computers Limited (ICL), Price-

waterhouse, Rank Xerox, Shell Bulgaria and the ITT

Sheraton. BIBA’s objectives are: to represent the inter-

ests of the international business community vis-a-vis

the Bulgarian authorities; to improve the business and

investment climate in Bulgaria; to function as an infor-

mation exchange tool; to pool the know-how and

expertise of its members on doing business in Bulgaria

and place it at the disposal of its members; to encourage

the commitment of its members to the advancement of

the Bulgarian society; to assert a new culture and new

business ethics as well as international standards and

quality of performance.2

BIBA changed dramatically in 1997. According to

then BIBA executive director Iliana Derilova, BIBA

was ‘‘just a club’’ before 1997, with no significant

impact on society. Committees were very small and

they did not interact with many outside the group. The

change was actually initiated by the new Bulgarian

government following the dramatic economic and

financial crisis in the country in the fall of 1996,

and the creation of a currency board in 1997. As a

result, BIBA’s current organization reflects both com-

pany and government needs.

Not surprisingly, BIBA is one of the most influen-

tial non-governmental organizations in Bulgaria. Its

membership has grown steadily, from 7 founding

members in 1992 to 170 members in 2001. Members

represent more than 20 countries, including some

supranational organizations such as the European

Bank for Reconstruction and Development. BIBA

generally focuses on common problems that foreign

investors encounter in Bulgaria. Specific company

problems can be brought to BIBA, but only to request

that BIBA organize meetings between the company

and government agencies. Individual company pro-

blems are typically resolved directly between the

company and relevant agencies.

Overall, contacts between Metro and BIBA are

organized through five major channels. First, Metro’s

managing director is a member of BIBA’s Board of

2 Statute of the Bulgarian International Business Association

(Sofia: BIBA, 2000, p. 3).


Directors, and participates in its regular meetings.

Second, there is a flexible email connection among

Executive Board members. A lot of questions are

discussed over the email. Third, Metro participates

in BIBA’s general meeting which convenes once a

year. Fourth, Metro has representatives in all BIBA

committees. These are Metro specialists on the parti-

cular thematic topics of each committee, such as the

Head of the Financial Department, the Chief Accoun-

tant, etc. Finally, Metro participates in the preparation

of the BIBA annual White Paper, in its part on trade

and trade legislation.

Through active lobbying activities, BIBA members,

including Metro, mediate political risk and influence

Bulgarian public policy at all levels. BIBA maintains a

regular dialogue with the Bulgarian government, the

Bulgaria Investment Forum, and international financial

institutions. It holds monthly meetings with Bulgarian

officials and regularly meets with representatives of

international financial institutions. Increasingly, as its

current executive director N. Babev notes, BIBA is

consulted by government officials on issues of EU

accession and harmonization of Bulgarian legislation

with the European common law. BIBA was a member

of the Consultative Council on Foreign Investment to

the Prime Minister created by the Kostov cabinet, and is

also a member of the recently created Council on

Economic Growth to the Council of Ministers within

the new Saxecouborggotski government. The Council

is, according to Metro’s managing director Mr. Abad-

jiev, a forum where BIBA can be heard. It comprises the

basic ministers (of finance, economy, etc.), and repre-

sentatives of the business community in the country—

BIBA, the Bulgarian Chamber of Commerce, the Bul-

garian Industrial Association, the Union of Employers

and the Vazrazhdane Union of Private Producers. The

Council holds meetings every week under an agenda

that has been distributed in advance. Overall Mr.

Abadjiev perceives the Council as a flexible instrument

for the synchronization of the interests of the state and

the business community: ‘‘Here our interests coincide.’’

BIBA is also one of the co-founders of the Bulgaria

Economic Forum and is represented in the forum’s

Board of Directors. BIBA also maintains regular

contacts with other national business consortiums

such as the Bulgarian Industrial Association and the

Bulgarian Chamber of Commerce and Industry. It has

an agreement with the Bulgarian Industrial Associa-

tion to use the latter’s permanent seat at the National

Council for Tripartite Cooperation as a channel for the

resolution of some societal problems of the political

environment such as industrial unrest.

During the June 2001 parliamentary election cam-

paign, BIBA members met with the five largest poli-

tical powers in the country. The foreign companies

heard the parties’ economic platforms and provided

feedback. The economic program of the winning poli-

tical party, the National Movement Simeon II, was

based on three business sources—the Velikden For

Bulgaria strategy, the Agenda 2005 of the Union of

Employers, and BIBA’s annual White Paper. After the

new government took office, BIBA communicated with

the new Prime Minister, Simeon Saxecoburggotski,

requesting a set of measures for the establishment of

an ethical and sustainable business environment. For-

eign investors urged for zero tolerance, high fines and

punishment for companies that evade taxes. They also

requested changes in creditor/debtor regulation.

As for whether Metro’s expectations were met by

BIBA: ‘‘it can always be more and better,’’ according to

Mr. Abadjiev. ‘‘Our expectations from BIBA are not

only in regard to how BIBA represents our interests, but

also how well it is heard by politicians and the public.’’

BIBA’s voice is thus best heard through its annual

White Paper, prepared since 1996 and officially pre-

sented to the Bulgarian government and international

institutions. The document renders an in-depth analysis

of the investment and business climate in the country

and sets out recommendations for improvement of the

national legislation initially in the areas of financial

services, tax regime, privatization, manufacturing,

logistics and distribution, IT and telecommunications,

and personnel (see Table 10 for an account of the

evolution of BIBA White Paper chapters since 1998).

In preparing the annual editions of the White Paper,

BIBA operates on the basis of permanent committees.

Their aim is to identify problems of common concern,

analyze various legislative issues, and formulate

BIBA official statements. Since 1997 BIBA incorpo-

rates the following six committees: Tax and Duties

Committee; Banking and Finance Committee;

Privatization Committee; Personnel Management

Committee; Trade and Distribution Committee; and

Industrial Committee. The committees meet regu-

larly depending on the concrete issues. All commit-

tees prepare draft chapters of the White Paper and


distribute them among all BIBA members (Table 11).

The papers must be approved by the Board of BIBA

before official distribution.

The 2000 White Paper showed a change in focus—

no longer concentrating on legal basics, but instead on

more detailed issues in a way more amenable to the

government. In part, this was due to the closer colla-

boration between the BIBA committees and relevant

government agencies during preparation of the docu-

ment. ‘‘This year’s White Paper is a boring document—

there are no scandals in it,’’ remarked then BIBA

President John Munnery when presenting the Paper

to the Prime Minister. However, the 2000 White Paper

did note the slow implementation of regulations essen-

tial to a healthy business climate. Investors are con-

cerned that legislation continues to hit targets outside

the original ones and demand regulations providing

clear interpretation of laws. The White Paper also

recommends that more attention should be paid to

small- and medium-sized Bulgarian enterprises, which

are becoming more important as a source of investment,

now that the big privatizations are drawing to a close.

The government has increased its response to the

White Paper. In February 2001 the Prime Minister

Ivan Kostov presented the President of BIBA with an

official set of answers to all problems identified in the

2000 BIBA White Paper. The 55-page document

contained positive answers to about 55–60% of all

issues raised in the White Paper, according to BIBA’s

then President Mr. John Munnery. Thus according to

BIBA information out of a total of 153 proposals, the

government’s response was ‘‘Yes’’ to 67 of them;

‘‘No’’ to 57; ‘‘Yes, but’’—17; ‘‘To be discussed’’—

2; ‘‘Already in place’’—1; and ‘‘No comment’’—9

(BIBA News, March–April 2001: 2). A more detailed

account of the proposals and the government response

reveals a very similar picture (see Table 12).

The highest acceptance rate was in the area of

manufacturing (81% of all proposals) followed by

financial services (62%). The sensitive issues of tax

regimes and privatization had a low acceptance rate, of

16% and 26%, respectively, but many of these pro-

posals were accepted with some reservations (29% of

the privatization proposals and 22% of the tax regime

proposals). Accordingly, the proposals rejected at the

highest rate were in the areas of advertising (83%), tax

regime (62%), and information technology and tele-

communications (50%).

BIBA’s political management, then, occurs at the

highest national level and does appear to affect national

legislation of relevance to member firms. Actions are

Table 10

Evolution of BIBA White Paper chapters

1998 1. Financial services

Banking

Bank privatization

Equipment leasing

Capital markets

2. Tax regime

3. Privatization

4. Manufacturing

5. Logistics and distribution

6. Telecommunications

7. Personnel


Banking

Financial sector privatization

Capital markets

Insurance

Pension funds

Equipment leasing

2. Tax regime

3. Privatization

4. Manufacturing

5. Logistics and distribution

6. Telecommunications

7. Personnel


Banking

Capital markets

Insurance

Pension funds

Accountancy and corporate governance

2. Tax regime

3. Privatization

4. Manufacturing

5. Advertising

6. IT and telecommunications

7. Personnel


Banking

Capital markets

Insurance

Pension funds

Accountancy

Financial leasing

2. Tax regime

3. Industry operations

4. Advertising

5. IT and telecommunications

6. Personnel


not firm-specific, however, so only general political

issues can be mediated through this mechanism. It is

possible that committee members develop useful ties

with government officials during their regular meetings

and that those ties may be used to mediate firm-specific

risks. Firms such as American Standard, that developed

close government ties during privatization or through

other mechanisms, could use those instead.

Aside from the national government links, BIBA’s

only connections are with other business consortia and

international financial institutions. They do not com-

municate on a regular basis with other potential sources

of political risk, such as public interest groups or

local governmental authorities. Companies with ex-

tensive exposure, for example those with substantial

manufacturing operation or with particularly politically

Table 11

BIBA committees

Committee name No. of members Tasks

Personnel Management 42 Maintain relations with the Ministry of Labor and Social Affairs

Discuss legislation on social and health contributions

Prepare the BIBA Salary Survey

Prepare the personnel chapter of the annual White Paper

Tax & Duty 33 Maintain relations with the Ministry of Finance

Discusses issues related to the national tax regime

Prepare the tax section of the annual White Paper

Banking and Finance 29 Discuss banking, capital markets, insurance, pension fund issues

Prepare the Financial Services Chapter of the annual White Paper

Trade and Distribution 23 Discuss legislation in regard to trade, distribution, marketing, and advertising

Prepare the logistics and distribution chapter of the annual White Paper

Industrial 16 Focus on internal (e.g., economic stability) and external issues

(e.g., EU accession) that affect the manufacturing sector

Prepare the manufacturing chapter of the annual White Paper

Privatization 15 Discuss issues related to privatization

Prepare the privatization chapter of the annual White Paper

Table 12

BIBA 2000 White Paper on foreign investment in Bulgaria

Issue areas BIBA

recommendations

Government response

Accept Accept with some

reservations

Reject

Financial services 29 18 (62.1%) 4 (13.8%) 7 (24.1%)

Banking 3 3 – –

Capital markets 11 7 – 4

Insurance 5 2 2 1

Pensions funds 6 3 1 2

Accountancy and corporate governance 4 3 1 –

Tax regime 32 5 (15.6%) 7 (21.9%) 20 (62.5%)

Privatization 35 9 (25.7%) 10 (28.6%) 16 (45.7%)

Manufacturing 16 13 (81.3%) 1 (6.2%) 2 (12.5%)

Advertising 6 1 (16.7%) – 5 (83.3%)

IT and telecommunications 12 5 (41.7%) 1 (8.3%) 6 (50%)

Personnel 14 7 (50%) 2 (14.3%) 5 (35.7%)

Total 144 (100%) 58 (40.2%) 25 (17.4%) 61 (42.4%)


sensitive businesses, would need to seek out other

political risk management strategies if they wanted

complete coverage.

This political risk strategy requires the devotion of

few corporate resources, but it also provides only

narrow political risk management. For the payment

of an annual fee (committee participation is optional),

the company gains information about national level

political action and has the opportunity to ask BIBA to

arrange meetings with government officials if neces-

sary. For firms with limited or relatively specific

exposures, this level of political risk management

may be adequate. Ergo, it is not surprising that the

membership of BIBA is distributed as it is. Despite the

fact that 55% of foreign investment in Bulgaria is

industrial investment, only 23% of BIBA members are

manufacturers. This is not a function of the relative

size of investment of members, by the way. Many of

the largest investors in Bulgaria are BIBA members,

but they are banks, which have very specific political

concerns, or trading companies, that are also primarily

concerned with narrow, national level issues. Some of

the manufacturers that have broader exposure and like

American Standard, probably developed political risk

management contacts through other means seem to

have opted out of the organization.

Given that the cost of entry into BIBA is so low,

however, it would not be surprising if every firm joined

the organization. The only significant deterrent to

membership would arise if a company’s operations

place it at odds with the bulk of BIBA members in

political terms. For example, American Standard has

more extensive assets in place and operates in a very

different region than most other BIBA members. As a

result, it may see inconsistencies between its own

objectives and those of other members and so chose

not to participate. That may have been the case for

other manufacturers as well.

9. The high involvement strategy for political riskmediation: the case of American Standard

American Standard Inc., based in the United States,

specializes in manufacturing and sales of plumbing

fixtures, air conditioners, sanitary and industrial fit-

tings and bath accessories. It first invested in Bulgaria

in 1992 making the country one of its key low-cost

production sources to supply Western European mar-

kets. Production of porcelain bathroom fixtures (e.g.,

toilets, sinks, baths) is a labor-intensive process and

transfer to a low wage country was necessary to

improve margins and remain competitive. Bulgaria

was a ‘‘strategically situated country with lower labor

costs,’’ providing easy access to crucial markets in

Western Europe, the Middle East, and elsewhere in

Eastern Europe, with labor costs only about one-tenth

of those in Western Europe.

American Standard entered gradually, developing

expertise before making significant investments

(Tagliabue, 2001). The group initially formed a joint

venture, Vidima Ideal, in 1992, to make bathroom and

kitchen fittings in Sevlievo, a small city in central

Bulgaria. The partner, Vidima, was founded in 1934

and then nationalized under state socialism. Vidima’s

product line was very similar to that of American

Standard. When the company was privatized in 1996,

American Standard purchased a 77% stake for $5.4

million. Turnover has risen from $8.5 million in 1992

to $68 million in 2001. Approximately about 96% of

the company’s output is exported to Western Europe.3

In 1996 American Standard opened a second, por-

celain plant in Sevlievo under the Ideal Standard name.

In May 2001, two new plants were opened in the village

of Gradnitsa. One, called Vidima-2, produces low-

value sanitary fittings, for export through Europe.

The second, called Vidima-3, produces deluxe brass

casings, for worldwide export. The company has also

made non-production investments in the local commu-

nity (such as the construction of the luxury four-star

Sevlievo Plaza hotel and the installation of gas utilities

in the Sevlievo region). By 2001, American Standard

was the 12th largest foreign investor in Bulgaria.

According to Vassil Kanev, CEO of one of the Bulgar-

ian units, the company’s total investment in Bulgaria

had increased to $96 million by 2001.

As a result of this entry strategy, American Standard

carries significant political risk exposure. In addition

to the potential for losing its assets in place, a range of

political actions could disrupt production or directly

disrupt export, thereby harming the company’s opera-

tions in Western Europe and to some extent world-

wide. As well, the extensive operations including all

3 ‘‘Sinking a Big Investment.’’ Financial Times, March 8, 1999;

and company data.


facets of business, can be affected by a wide range of

regulatory changes and also non-governmental actions

(e.g., protests). To respond to these diverse political

risks, American Standard developed a high involve-

ment strategy. We can tentatively identify four ele-

ments of this strategy—coalition of suppliers; contacts

with the national government; contacts with local

stakeholders; and relations with employees.

First, American Standard has become a magnet for

foreign investment. Though the company has about 50

suppliers locally, it also relies heavily on Western

suppliers for products not available locally. As a

significant buyer, American Standard has been able

to force suppliers from Germany, Austria, Spain and

Italy to open operations in Bulgaria to ensure rapid and

dependable supply. One major supplier, Gruppo

Minerali of Italy, which provides some of the 600

tons of raw materials—clays, sand and the like—that

the porcelain factory consumes every week, is already

building a processing plant in Sevlievo. They will

provide all the materials American Standard’s works

in Bulgaria and Germany need. Though primarily

driven by a need for production efficiency, this strat-

egy also produces general goodwill with local and

national government officials who recognize the need

for investment and also, a coalition of companies

ready to act in unison on political issues.

Second, American Standard has pursued direct con-

tact with the national government. These contacts have

two major goals—management of day-to-day needs,

such as license and certificate requirements, and poli-

tical risk mediation, as with lobbying activities to effect

preferred tax and customs policies. These contacts were

developed by the local Bulgarian management in the

early post-privatization years, when the political system

was particularly ambiguous. Executives worked to

maintain their government contacts, illustrated by fre-

quent visits by government representatives to the plants.

To support these government contacts, American

Standard has sponsored non-business activities that

show the government in a positive light. For example,

in October 1998, American Standard Companies

sponsored a path-breaking conference in Bulgaria

on government transparency and accountability.

American Standard not only provided the funding,

it also participated actively in the conference, demon-

strating how a partnership between a government with

reformist intentions, a think tank, and the corporate

sector can help develop strategies to improve govern-

ing institutions and democratization. The conference

was entitled ‘‘Foreign Investments, Transparency, and

Economic Growth.’’ Speakers included, among others,

then Prime Minister Ivan Kostov and the president of

American Standard Companies. American Standard

was able to expand on the positive public relations

aspect of the conference for the Bulgarian govern-

ment, by drawing in the U.S.-based National Endow-

ment for Democracy and the U.S. embassy in Sofia.

A third coalition building strategy used is to develop

strong relationships with local stakeholders. American

Standard is one of the few foreign investors that are not

centered in the capital Sofia but in a remote area. The

Gabrovo region is fifth in the country in terms of

foreign investment. The company is recognized as a

major force for development to this struggling region

on the edge of the Balkan Mountains. The company

renovated the old Vidima plant and brought in new

technologies to the region. Employment expansion has

also been a benefit for a variety of local stakeholders.

Jobs at the plants are so plentiful that workers have to

be bused in by the company from towns as far as 35

miles away. This benefits not only local government

agencies interested in development, but also nascent

local business that supply and support workers, local

cultural and recreational organizations that benefit

from the growth in wages, etc.

The creation of local ties has been strengthened

through network action to ensure long-term invest-

ments in local communities. The company has worked

with other local stakeholders to improve local social

services, such as health care, education, communica-

tions, commercial networks, sport and recreation, and

others. American Standard has provided substantial

financial assistance, helping to pay for the extension

of gas lines and fiber optic cables to Sevlievo, making

donations to the hospital (U.S.$ 70,000), supporting

two technical schools for ceramics and metal proces-

sing; and supporting local sport clubs. The company

also provides English language education for more than

400 students in Sevlievo. In 1999, the company opened

the city’s first hotel, the 40-room four-star Sevlievo

Plaza. Again in 1999, Sevlievo even got its own

customs office, mainly to handle the company’s ship-

ments. In addition, Gradnitsa, 12 km from Sevlievo and

site of the new plants, is the only Bulgarian village

with gas supply and optic-fiber telecommunications.


It thus enjoys all advantages of this connection: instant

on-line access to the rest of the world and videoteleph-

ony. Local government agencies and other organiza-

tions have played a role also to ensure that the projects

move forward (licenses, designs, links with other

regional governments, etc.) and found other sources

of capital when necessary.

As a group, the network created an environment that

is more attractive as a business center. In fact, the goal

of the Vidima management is to turn the city and the

region into a center of aristocratic sports such as

motorcycling, golf, hunting and fishing. Not acciden-

tally, Vasil Kanev, the CEO of Vidima was awarded

the prestigious distinction ‘‘Mr. Economy 2000,’’ for

turning Sevlievo into a ‘‘dream city.’’

American Standard’s fourth coalition building strat-

egy has been the creation of strong ties with its unions,

employees and related workers in the region. The

company directly employs about 3,350 Bulgarians

and indirectly employs about five times that many,

including truck drivers and construction workers. The

average salary in the company is $175 to $220 a

month, which compares well to the country’s national

average wage of $100. American standard has invested

in improving work conditions, remuneration and

social services for its employees, and helped to

improve human resource practices and labor–manage-

ment relations in general. This has clearly helped the

company avoid labor friction, which has been com-

mon nationally; it has never faced a strike action.

Work conditions have been improved through sig-

nificant investments. These include the supply of

safety devices for the workers and the workplace,

and the introduction of new technologies with safer

parameters for the workplace. Social benefits are

higher than the average for the country. The company

covers transportation costs, health care, catering,

including free food and beverages, and some discounts

for the families of retired workers. Human resource

management group’s main priority is the development

of a new type of work culture that increases produc-

tivity and quality and develops entrepreneurial think-

ing and personal identification with the company.

There are two trade unions in Vidima (Confederation

of Independent Trade Unions in Bulgaria or CITUB,

and Podkrepa Confederation of Labor) and most of

the employment benefits have been negotiated into the

company’s collective agreement. Prior to American

Standard’s entry in 1992, relations with management

had been institutionalized with a joint labor–manage-

ment Commission for Social and Economic

Partnership. Upon acquisition, the company accepted

that structure. The commission is comprised of eight

management members and eight union members (five

seats for CITUB and three for Podkrepa). It has three

co-chairs: the CEO of Vidima and the leaders of the two

unions. The commission discusses and approves the

minimum and average wage for the company, and

related skill levels and personnel categories. Any indi-

vidual wage disputes are also discussed in this commis-

sion. Collective agreements with the trade unions are

concluded on a regular annual basis but they are

discussed twice a year for amendments which gives

a lot of flexibility in labor–management relations.

10. Conclusion and managerial implications

In our review of political risk mediation strategies in

Bulgaria, we found that two strategies were pursued—

a low-investment strategy and a high involvement

strategy. The former used a network of similar com-

panies that worked on issues of common concern with

a relatively narrow range of political entities. The

latter created a broad network of diverse participants

to gather information and potentially assist in the

mediation of risks.

The first strategy, typified by BIBA, is particularly

suited to companies with more limited exposure to

political risk, either because of limited investment or

due to the narrow nature of business risks. The strategy

requires minimal resources and returns few, but poten-

tially valuable contacts with senior government offi-

cials. Because of the limited resources necessary to

pursue this strategy, we would expect many members

who pursue the high involvement strategy to also

participate in the low involvement strategy. On the

other hand, companies with extensive political risk

exposure may have concerns that put them at odds

with the bulk of corporate strategy members and so,

they may choose not to participate. American Stan-

dard, for example, initially was a member of BIBA but

later decided to leave the coalition.

The second strategy, typified by the network estab-

lished by American Standard, is well suited to com-

panies with extensive exposure to political risk in


the ambiguous and changing business environment

of Bulgaria. The strategy requires substantial re-

sources to establish and maintain. In return, however,

the firm gains information and expertise of a wide

variety of actors. When members of the network

have common political objectives, they can form a

stronger coalition for political action. Even when

members do not have common objectives, the com-

munication channels developed with this strategy

make it more likely that political risks can be avoided

through early contact and negotiation (Gladwin &

Walter, 1980).

It is clear that political risk assessment and manage-

ment responds to standard economic pressures on

businesses. As companies enter and expand into

new markets, they must find the means to manage

turbulent political environments without creating sys-

tems that are so elaborate that they force the company

into a financial loss. All of the strategies that were

found in Bulgaria allowed companies to leverage the

resources and skills of other actors to efficiently

manage their political environment. In the Metro/

BIBA case, firms pooled resources to gain scale. In

the American Standard case, the company was able to

use the knowledge, skills, and networks of many

external organizations to manage its particularly com-

plex environment. Managing political risk alone is

probably not a viable strategy because of the very high

costs, even if the same ends could be achieved.

As private investment in the Bulgarian economy

continues and ages, it is likely that we would see

development of even more elaborate and overlapping

political risk management strategies. In long-term

industrialized, capitalist societies, there are a host

of political risk management channels including

industry consortiums, regional consortiums, tempor-

ary business–government working groups, etc. The

value of looking at the Bulgarian business system

is that we were able to consider political risk manage-

ment at a time when there were limited business insti-

tutions and so, more clearly see the pursuit of different

strategies.

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