M acroeconomic Framework for Technology Encouragement in Bulgaria

1. Macroeconomic Framework for Technology Encouragement in Bulgaria ORGANISATIONAL STRUCTURE AND MAIN OBJECTIVES OF THE PROJECT

2. Project Organisational Chart Intergovernmental Treaty Government ofR. Bulgaria Government of FR Germany technical co-operation Ministry of Economy of R. Bulgaria German Society of Technical Co-operation project results Fraunhofer (main contractor ) Government Bodies Branch Organisations NGOs consultations and co-ordination CED (subcontractor)

3. Project Objectives • 1st Level Objective: A macro economic support framework for the technology development in Bulgaria is developed • 2nd Level Objectives : • Basic level conditions for the support of the technology sector in Bulgaria are defined. • The analysis of the current situation of the technology sector in Bulgaria is placed in the global context. A SWOT analysis of the macroeconomic conditions for the technology sector is accomplished and suggestions for necessary improvements on macroeconomic level are formulated. • Bulgarian experts are trained with the German practice of technology support. • An Annual programme for development of technology sector is accomplished . • Instruments and activities for the support of the technology sector in Bulgaria are developed.

4. Macroeconomic Framework for Technology Encouragement in Bulgaria SWOT Analysis of Bulgarian Technology Development SWOT = Strengths, Weaknesses, Opportunities and Threats

5. High Technology Sectors Groupings (Eurostat, OECD) • Higher-tech Manufacturing Sectors: • NACE 30: Office Machinery and Computers • NACE 32: Radio, Television and Communication Equipment and Apparatus • Medium-high-tech Manufacturing Sectors: • NACE 24: Chemicals and Chemical Products • NACE 29: Machinery and Equipment N.E.C. • NACE 31: Electrical Machinery and Apparatus • NACE 33: Medical, Precision and Optical Instruments, Watches and Clocks • NACE 34: Motor Vehicles, Trailers and Semi Trailers • High-tech Services: • NACE 64: Post and Telecommunications • NACE 72: Computer and Related Activities • NACE 73: Research and Development

6. Influence of Technology Development on the Bulgarian Competitiveness Innovation incl. Scientific researches level, public and business R&D expenditure,co-operation between Universities andcompanies, new products development,etc. Technology innovation or technology transfer Technology Transferincl. licensing and direct investment of foreign companies in technology Economic Creativity Based on Technology and Start-up Ease of Activating New Businesses Start-up based on the three indicators to the left Venture Capital Financing Availability Possibility to Obtain Loan with Little Collateral Source: The Global Competitiveness Report 2000, World Economic Forum - Davos

7. Economic Creativity Indicators Ranking 10 20 30 40 50 60 1 BG BG BG BG BG BG BG BG BG BG BG BG BG BG BG BG BG BG BG BG GR Technology Development D PL HU TR CZ SL TR HU Innovations GR CZ D SL PL Technology Transfer HU GR TR CZ SL PL D Start-up D GR SL CZ HU TR PL Economic Creativity CZ GR D HU TR SL PL Source: The Global Competitiveness Report 2000, World Economic Forum - Davos

8. Education and R&D Expenditure - Stabilisation and Signs for Positive Trends Source: National Statistical Institute

9. Main characteristics of HT sectors- Growth in HT Services

10. Over 40% Growth Rates of the Higher - Tech Industrial Enterprises Production in 2000 Source: National Statistical Institute

11. SWOT Analysis of the Bulgarian Technological Environment THREATS THREATS • “Brain drain” • The education system is not practically oriented and there is lack of modern equipment in the field of communication and information technologies • Low level of R&D expenditures, especially in Enterprise Sector • Delay in the HT legislation development and slow process of EU standards adoption in the field of high-technologies • Lack of information on globalization • Lack of HT Parks and centers • Lack of co-operation between Universities, R&D institutes and business OPPORTUNITIES • The young people are very interested in HT • Leading foreign technology companies are working in Bulgaria, which classifies the Bulgarian market as an open market with high level of competitiveness • Understood necessity for policy in education and new technologies • Decreasing costs for transfer of knowledge, technologies and goods • Good education system in the traditional teaching • Fast growth of the new high tech sectors as Internet, Multimedia, E-commerce, Biotechnologies • Demonopolsation of the Bulgarian telecommunication market • High share of European countries in the Bulgarian foreign trade OPPORTUNITIES STRENGTHS WEAKNESSES WEAKNESSES • Low technology level in the country • Slower development of new technology infrastructures ( mobile phones, Internet, etc.) • Difficult loan access, especially for new companies • Unfavorable fiscal environment (social insurance, VAT, depreciation) • A substantial part of the entrepreneurs do not have sufficient marketing, financial, accounting and legal knowledge • Limited domestic market and lack of new markets • Negative export trends - decreasing share of HT products STRENGTHS • Qualified technical personnel - combination of hardware and software skills • The most of negative trends in the technology industries were stopped in 1999- 2000 • Stable economic and financial environment (Incl. macroeconomic indicators, banking system, stock market, etc.) • Flexibility and good distribution of quality products on relatively low prices ( software industry) • Relatively good traditional infrastructure (telephones , railways, roads, etc.) • The entrepreneurs understand the role of R&D for better competitiveness • Tendencies of R&D market reorganisation • Increasing share of HT products in Bulgarian Import Available PotentialDevelopment in Perspective ProblemsChances for Development

12. SWOT Analysis of Education THREATS • Young specialists emigrate after their graduation (150-250 USD monthly salary in Bulgaria for IT expert compared to 4 000 USD minimal monthly salary in the USA for a similar position) • Bulgarian education is not practically oriented and the co-operation between Universities, R&D Institutes and business is low • Fast development of staff requirements and necessity of constant training Available PotentialDevelopment in Perspective OPPORTUNITIES • The young people are interested in education on information and communication technologies (3 836 candidates for IT education, min 19.8 scores for successful students (max 21), 1 784 candidates for CT education, min 19,6 scores (max 21), from 12 to 530 candidates for the other subjects) • The public authorities understand the critical importance of IT and political decisions in information and communication technologies education have been made (National Strategy on Information and Communication Technologies and Action Plan in this direction) STRENGTHS • Traditions in technical education • Specialized high technical schools • 50 675 students in 1999 and about 38 % of them on technical subjects • Developed network of Universities - Technical universities in Sofia, Varna, Ruse, Gabrovo WEAKNESSES • Low level of integration between IT and other subjects • Low level of IT equipment in the education system • One 8 bit computer per 24 pupils • One 16 bit computer per 70 pupils • Low level of IT qualification of the teachers and lack of motivation IT to be used in educational process ProblemsChances for Development

13. Education - Opportunity or Threat for Bulgarian Technological Development? • The existing outdated equipment and its quantity does not provide modern education using information and communication technologies • The education programmmes on ICT are out-of-date • The usage of data bases, computer models and simulations, multimedia and Internet is an exception but not a common practice • The teachers on subjects different than IT are not well qualified in ICT

14. SWOT Analysis of the Bulgarian Technological Environment THREATS • Low level of R&D expenditures, especially in Enterprise Sector • Delay in the HT legislation development and slow process of EU standards adoption in the field of high-technologies • Lack of information on globalizationand HT Parks and centers • Lack of co-operation between Universities, R&D institutes and business OPPORTUNITIES • Leading foreign technology companiesthat work in Bulgaria, which classifies the Bulgarian market as an open market with high level of competitiveness • Policy actions in education and new technologies • Demonopolsation of the Bulgarian telecommunication market WEAKNESSES • Low technology level in the country • Slower development of new technology infrastructures ( mobile phones, Internet, etc.) • A substantial part of the entrepreneurs do not have sufficient marketing, financial and accounting and legal knowledge STRENGTHS • Qualified technical personnel - combination of hardware and software skills • Tendencies of R&D market reorganisation • Relatively good traditional infrastructure (telephones , railways, roads, etc.) • The entrepreneurs understand the role of R&D for better competitiveness Available PotentialDevelopment in Perspective ProblemsChances for Development

15. Low Level of R&D Expenditure

16. Slower Development of the new Technological Infrastructures Internet hosts - development of traditional Internet Mobile phones density - precondition for mobile Internet Development

17. Political Actions in HT Development • The National Programme and Strategy for Information Society Development; • The Bulgaria 2001 Agenda of the Council of Ministers for the period 1997-2001. • The National Programme for the Adoption of EU Law Achievements; • The Strategy for Developing a Modern Administrative System in the Republic of Bulgaria; • The National Strategy for Encouraging the Development of Small and Medium-sized Businesses; • The Uniform National Strategy for Crime Prevention; • The National Strategy for the Development of High Technologies • The National Electronic Trade Programme; • The National Education Strategy for Information and Communication Technologies • Telecommunications Sector Policy • Electronic Signature and Electronic Document Act (Draft) • High-tech Activities and High-tech Parks Act (Draft)

18. Tendencies of R&D Market Reorganisation • Due to financial restrictions in resulting from the currency board, and from the economic sectors decentralisation, public procurement for such activities has declined, reaching a critical minimum. • The former large-size line research institutes, which are characterised by a high level of expenditure, ineffective management and obsolete material basis, cannot provide specialised services for the private sector in the state of a growing competitiveness of foreign consulting and design companies operating in the country. • Currently, most of the research orders are placed by international sponsors who prefer to operate with Western consultants, and in most cases the Bulgarian institutes act as sub-contractors only. • A new generation of small companies and research organisations is emerging, establishes by leading specialists in the respective sectors. Most of the founders are highly skilled experts of vast experience in the respective area, who have split up from the huge research and design institutes. Most of those new units are characterised by flexible management, innovative thinking, and entrepreneurial spirit but are still in their initial phase of growth. • The market of Research and Development products and services is increasingly oriented towards applied research, which is targeted and sponsored by external firms and organisations, contrary to the State-funded fundamental research in the past.

19. SWOT Analysis of the Bulgarian Foreign Trade with HT products THREATS • Lack of information on globalisationand HT parks and centers to support the image of Bulgarian HT Parks • Slow and expensive process of international HT standards adoption OPPORTUNITIES • Bulgarian market is open with high level of competitiveness • Decreasing costs for transfer of knowledge, technologies and goods • Fast growth of the new high tech sectors as Internet, Multimedia, E-commerce, Biotechnologies • High share of European countries in the Bulgarian foreign trade WEAKNESSES • A substantial part of the entrepreneurs do not have sufficient marketing, financial, accounting and legal knowledge • Limited domestic market and lack of new markets • Negative export trends - decreasingshare of HT products • Insufficient statistical information about trade with HT products STRENGTHS • Flexibility and good distribution of quality products on relatively low prices ( software industry) • Increasing share of HT products in Bulgarian Import Available PotentialDevelopment in Perspective ProblemsChances for Development

20. Main Trends of HT Products Import • Increase of import of high tech products not only as a total value but even more seriously as a share of all imports; • 20% increase of imports of high tech products when all imports drop slightly; • Positive balance of trade in high tech products for 1997 which is 4 times larger than the whole positive trade balance.

21. Main Trends of HT Products Export • Decreased total value of high tech export • Decreased share of high tech exportin total Bulgarian export • The decrease in high tech export exceeds the decrease in all export • Decreased prices of major Bulgarian high tech export - chemical products • Negative balance of trade in high tech products in 1998 which represents 70% of the whole negative trade balance

22. Main Conclusions Drawn from The Sector Analyses • The Bulgarian software industry is highly competitive and has high growth potential. The main problem in the sector is emigration of highly qualified experts. • Despite the rapid decrease in Microelectronics, fast development of certain companies in the sector that are competitive in global terms is a fact. The products of these companies are used by world famous companies producing cars, appliances, etc. • Bio-technology sector has good traditions in Bulgaria. There is certain growth in its development but the economic growth capacity of the sector seems to be undervalued and non - utilised. • There are some negative trends in Automation sector such as as low demand, lack of new products and low competitiveness of the sector.

23. SWOT Analysis of Fiscal Environment OPPORTUNITIES • Improving the possibilities for tax planing; • Using Internet for supporting the tax policy generating activities; • Using modern risk assessment methodologies; • Changes in the tax legislation to stimulate the technology sector and R&D; • Harmonization of the VAT with the European standards. THREATS and WEAKNESSES • Impossibility to offset capital losses against the capital gains; • Tax treatment of the payments for computer software; • No tax allowances on investment purchases and the depreciation is deemed as an expenditure only in a scope defined in the CIT; • Input VAT refunds; • VAT restrictions on registration; • Clarifying the VAT treatment of the export of goods; • Difficulties in obtaining assistance from the tax offices; • Very high taxes on wages and relatively high social security contributions paid by the employer. Available PotentialDevelopment in Perspective STRENGTHS • The Bulgarian tax regime is to a great extend in line with the European standards; • Financial stability; • Improvements in the tax legislation; • Reduction of tax rates. ProblemsChances for Development

24. Some Characteristics of Technology-related Fiscal Environment in EU Member States • Most OECD countries allow for a full write-off of current R&D expenditures • In the longer run, direct subsidies are more effective than fiscal incentives • Austrian research and development expenses are tax deductible at the rate of 112% of the actual amounts • Repairs, maintenance and modernisation costs in Italy are deductible up to a maximum of 5% of the cost of depreciable assets • In almost all developed countries an accelerated 100% depreciation is available for computers and software, and in some cases for acquisition of goods related to R&D.

25. SWOT Analysis of Financial Environment OPPORTUNITIES • Growing competition in banking sector • Further consolidation of small banks • Implementing of modern banking products and services • Deregulation of the banking sector according to the requirements of the EU • Development of flexible schemes for export financing • Enlargement of the kind of papers traded on the floor - GDRs THREATS • Theoretical possibility of decreasing the quality of credit portfolio • Slow pace of development in comparison with that in real economy • To keep the current situation • The possibility to increase the capital of a company in favour of only one of the owners. Available PotentialDevelopment in Perspective WEAKNESSES • High level of required collateral - 160-200% and wide interest spread - 8-9% • Lack of special treatment of the credits extended to technology sector • Short maturity of the extended loans - over 80% are short-term loans (up to 1 year) • No access to credit for new companies • Low investment activity • Long procedure in registering of new stocks • Low investment culture of the companies and weak corporate governance • It is practically impossible for new companies to issue stocks on the market • STRENGTHS • Stable banking market, with good liquidity and high quality of the credit portfolio and well developed branch-network • Well-established legal framework • Presence of well known foreign banks on the market - Citibank, ING, BNP, Uni-Creditto, Raiffeisenbank, NBG • Stable tendency of growth of the banking assets. • Market is well regulated and established • Over 940 companies are listed on the stock market - Issuing of corporate bonds - ProSoft, Energia, Albena, etc ProblemsChances for Development